Leased Proof of Stake (LPoS) Explained: What Is It and How Does It Work?
Blockchain technology relies on consensus mechanisms to authenticate and verify cryptocurrency transactions and add blocks to the network. These mechanisms ensure that every transaction on the blockchain is recorded, and every node on the network has access to a copy of verified transactions.
Two of the most well-known consensus mechanisms are Proof of Work (PoW) and Proof of Stake (PoS). PoW, used by Bitcoin, involves a pool of nodes randomly selected to validate transactions. PoS, created in response to PoW’s limitations, involves a network of validators where the odds of being selected increase with higher stakes. One variant of PoS is Leased Proof of Stake (LPoS), which allows investors to lend their cryptocurrency to validators. In this article will dig deeper into what LPoS is and how it works. Let’s take a look:
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What is Leased Proof of Stake (LPoS)?
Leased Proof of Stake (LPoS) is a consensus mechanism used in blockchain networks that allows token holders to lease their cryptocurrency holdings to network nodes, referred to as validators. These leased tokens contribute to the security and validation of transactions on the blockchain.
LPoS is particularly associated with the Waves blockchain, where the primary cryptocurrency is the WAVES token. Token holders stake and lease their tokens to secure the network. LPoS simplifies the process by allowing crypto holders with limited blockchain knowledge to lease their coins to validators, thereby improving their chances of block creation. Upon successfully leasing tokens, users receive a share of the transaction fees paid to validators.
Key Takeaways
- Leased Proof of Stake (LPoS) allows token holders to lease their cryptocurrency to validators, improving network security and earning rewards.
- LPoS simplifies blockchain participation by enabling users to contribute to transaction validation without extensive technical knowledge.
- This consensus mechanism promotes decentralization and inclusivity, reducing centralization risks and increasing network resilience.
- Token holders maintain control and liquidity over their leased assets while benefiting from shared validator rewards.
How Does Leased Proof of Stake (LPoS) Work?
Lease Transaction Creation
To lease their coins, participants create a ‘lease transaction,’ specifying the number of coins to be leased and the validator to receive the lease. Token holders maintain full control over their coins and can transfer or withdraw them anytime. This aspect of LPoS ensures that participants retain liquidity and flexibility with their assets, unlike some other staking mechanisms where tokens are locked up for extended periods.
Validator’s Role
The leased coins become part of the validator’s stake. Validators protect the blockchain network by verifying transactions and creating new blocks. This process involves several steps:
- Transaction Pool Monitoring: Validators monitor the transaction pool for pending transactions. These transactions are collected and grouped into a candidate block.
- Block Proposal: Validators propose a new block that contains the collected transactions. This block includes essential information such as a timestamp, a link to the previous block, and a cryptographic hash.
- Broadcasting the Block: The proposed block is broadcast to the network, where other validators and nodes verify its validity. This verification process ensures that the block adheres to the network’s rules and that the included transactions are legitimate.
- Adding the Block to the Blockchain: Once verified, the block is added to the blockchain. This addition increases the validator’s reputation and stake weight, improving their chances of being selected for future block proposals.
Reward Distribution
Validators earn rewards through transaction fees from the blocks they create and newly generated tokens. These rewards are distributed among the token holders who leased their coins to the validators. The distribution process works as follows:
- Reward Calculation: The total rewards earned by a validator are calculated based on the transaction fees and block rewards. This total is then divided proportionally among the validators and the token holders who leased their tokens.
- Proportional Distribution: The rewards are distributed proportionally to the amount of tokens leased. For example, if a participant leased 10% of the validator’s total stake, they would receive 10% of the rewards.
- Incentive Mechanism: This shared reward system creates a collective incentive for participants to lease their tokens to reputable validators. It also encourages validators to act honestly and efficiently to maximize their rewards and maintain the trust of the token holders.
Staking Power
Leased tokens enhance the validators’ staking power, increasing their potential to earn more rewards and securing the blockchain network. This increased staking power has several benefits:
- Higher Chances of Block Creation: Validators with higher staking power have a greater chance of being selected to propose and validate new blocks. This selection is based on the stake weight, which includes both the validator’s own tokens and the leased tokens.
- Network Security: Higher staking power contributes to the overall security of the blockchain network. Validators with significant stakes have a vested interest in maintaining the network’s integrity and security.
- Decentralized Participation: By enabling token holders to lease their tokens, LPoS promotes decentralized participation in network security. This decentralization reduces the risk of centralization and enhances the network’s resilience against attacks.
Execution of LPoS Transactions
To execute LPoS transactions, token holders establish a lease transaction by providing the destination address (node address) and the token amount they wish to lease. The process involves the following steps:
- Creating a Lease Transaction: The token holder creates a lease transaction, specifying the number of tokens to be leased and the destination address (validator’s node address). This transaction is then broadcast to the network.
- Leasing Period: The tokens are leased for a specified period, during which the validator can use them to increase their staking power and participate in block validation.
- Lease Cancellation: At any time, the token holder can create a lease cancellation transaction to end the leasing period. This flexibility allows token holders to reclaim their tokens and maintain control over their assets.
- Reward Collection: During the leasing period, the token holder receives a share of the validator’s rewards. These rewards are automatically distributed based on the leased tokens and the validator’s performance.
Examples of Blockchains that Utilize LPoS
WAVES
The WAVES blockchain platform uses the LPoS mechanism. Lessors need 1,000 WAVES to participate in creating blocks. If enough token holders lease their coins, the node balance can reach 1,000 WAVES to create a block. The lessor receives a percentage of the node’s block production rate once the node is selected.
NIX
NIX uses a permissionless leased staking mechanism, enabling users to stake their coins through a third-party wallet without typical trust issues. Third parties providing staking services reliably receive a stake fee incentive based on a leasing smart contract signed by the owner.
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Selection of Validators in LPoS
Stake Weight
Stake weight measures a validator’s influence within the network, determined by the number of assets staked or delegated for network validation. Validators with higher stake weights have a greater likelihood of being selected to validate transactions and create new blocks. In LPoS, stake weight may include tokens leased by users to validators. Participants with larger stake weights are considered more trustworthy contributors to the consensus process.
Block Proposal
Validators propose new blocks containing a series of pending transactions. These blocks include a timestamp, a link to the previous block, and the merged transactions, which are then broadcast to the network.
Block Validation
After selecting validators and creating new blocks, the network verifies them. Validators authenticate the block and confirm that each transaction follows network rules before adding them to the blockchain. Unlike PoW, which requires solving mathematical puzzles, LPoS relies on validators selected based on stake weight.
Benefits of Leased Proof of Stake (LPoS)
Reduced Centralization
LPoS encourages wider participation in network validation, effectively reducing centralization. Users can contribute to the network’s security without needing prior knowledge of operating nodes.
Inclusivity and Rewards
The LPoS model allows token holders with smaller holdings to earn rewards by leasing to larger validators. There is no minimum staking amount, and leasing to larger validators improves their chances of creating blocks and earning transaction fees.
Enhanced Security
Increased participation in LPoS networks heightens security. More participants bolster the network’s resilience against potential threats.
Liquidity and Control
Token holders who lease their tokens can earn rewards while maintaining control over their assets. Leased tokens remain under the token holder’s control, allowing them to retain liquidity.
Drawbacks of Leased Proof of Stake (LPoS)
Potential for Malicious Acts
In LPoS, where users lease to a single full node, malicious acts can be planned. This node has an advantage over others and is favored to validate blocks of transactions, potentially leading to centralization.
Centralization Concerns
Leased proof of stake can result in a select few nodes controlling the network. Users question the authority LPoS bestows upon node owners to exclusively share a percentage of the rewards, which may defeat the purpose of decentralization.
Conclusion
Leased Proof of Stake encourages decentralization and security in blockchain networks by allowing token holders to lease their assets to validators. This consensus mechanism promises inclusivity, allowing network participants to access a wider audience, retain control of their leased tokens, and earn rewards without sacrificing network security. Looking ahead, LPoS decentralization and economic rewards can propel broader adoption and acceptance within blockchain systems, making it one of the most reliable consensus mechanisms for token holders and validators.
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