Understanding leased proof-of-stake (LPoS) is essential for cryptocurrency users who are familiar with proof-of-stake (PoS) and want to explore its variations. LPoS is a type of PoS that aims to address issues found in other types of PoS, such as delegated proof-of-stake (DPoS), as well as improve mining power and the PoW system.
Proof-of-stake is a fundamental concept in the blockchain consensus mechanism. Validators participate in staking, where they stake cryptocurrency to generate and validate transaction blocks. In traditional PoS platforms, validators typically need to stake a significant amount of cryptocurrency to increase their chances of block generation. This is where LPoS comes into play.
LPoS allows tokenholders who don’t possess the technical expertise or financial resources to lease their tokens to validator node operators. By leasing their tokens, they enhance the validator’s chances of receiving the opportunity to create new blocks. In return, they earn a share of the transaction fee paid to the validator.
In an LPoS environment, tokenholders have the option to lease their stake or run a full node. However, the more tokens staked by a node, the higher its chances of being selected to generate a new block. This enables users to acquire mining rewards without going through the actual mining process.
The process of leased proof-of-stake works similarly to a lottery. The more stakes a user has, the higher their chances of winning rewards. The LPoS system follows a series of set processes:
1. Create a lease transaction: Tokenholders lease coins to a node, specifying the amount and recipient address. Leases can be canceled at any time.
2. Wait for block generation: Leased funds join a node’s pool, increasing the chance of winning the next-block lottery.
3. Consensus participation: Leasers join the consensus process, where larger nodes have better odds of generating the next block.
4. Generate blocks: Winning nodes validate transactions, compile them into blocks, and earn transaction fees as rewards.
5. Share rewards: Node operators distribute rewards to leasers based on their investment, with higher stakes leading to higher rewards.
It’s important to note that the leased tokens remain in the leaser’s hardware wallet under their total control. The holder only links the chosen node(s) and doesn’t transfer the tokens to the node. The tokens cannot be traded or transferred by any party, including the holder. They can only be spent or transacted upon canceling the lease.
Key features of LPoS include decentralization, balance leasing, fixed tokens, and scalability. LPoS promotes decentralization by dividing rewards based on the staked amount, eliminating the need for a mining pool. It also provides unpredictable block generation, ensuring fairness in the process. LPoS does not add more tokens to the system through mining, as it only allows token leasing. Developers prioritize high-on-chain scalability over second-tier apps. Unlike other blockchain systems that offer block token rewards, LPoS issues transaction fees as rewards to successful node operators.
LPoS plays a crucial role in blockchain validation by utilizing nodes to verify and validate transactions. Node-based validation uses computational randomness and the financial stake of a node to assign rights for transaction validation. Factors such as the age and size of staked tokens are used to determine the best fit for validating transactions. PoS is more resource-efficient than PoW, as it relies on passive cryptocurrency deposits rather than raw computational power.
Currently, two leading blockchains utilize LPoS: Waves and Nix. Waves uses LPoS to verify the blockchain’s state by allowing users to lease tokens to generating nodes and receive rewards distributed by these nodes. Nix utilizes a permissionless staking mechanism where users can stake through a third-party wallet responsible for the staking.
The benefits of leased proof-of-stake include passive investment, allowing smaller investors to participate, difficulty in manipulation, increased chances of winning rewards, retained ownership of tokens, and a low barrier to entry. LPoS provides an opportunity for users to receive rewards without actively trading and allows smaller investors to participate in block generation. The system prevents manipulation attempts by considering the generating balance and increases the chances of receiving rewards when leasing tokens to larger nodes.
There are alternatives to LPoS that use the PoS consensus mechanism, including delegated proof-of-stake (DPoS), pure proof-of-stake (PPoS), proof-of-validation (PoV), and hybrid proof-of-stake (HPoS). DPoS allows users to delegate block production to delegates through a voting system. PPoS is used by the Algorand blockchain for DApp development. PoV achieves consensus through staked validator nodes. HPoS combines the power of PoS and PoW to validate blocks.