Not everyone knows this, but there are different forms of Proof of Stake (PoS).
Proof of Stake is an alternative method to Proof of Work (PoW) for validating transactions on blockchain.
The world’s first blockchain, the Bitcoin blockchain, has always been based on PoW, but this method appears to be relatively slow and, above all, very expensive. Securing a PoW-based network requires miners to do a lot of work, and that work costs electricity.
The Proof of Stake (PoS) based consensus mechanism
To speed up the validation of transactions on blockchain and, more importantly, make it less energy intensive, Proof of Stake, or an alternative validation method for PoW, was invented.
PoS does not require miners to do any work, so much so that no miners are even needed. When Ethereum switched from PoW to PoS in September 2022, ETH mining simply ceased to exist for good.
The concept behind PoS is that those who want to participate in transaction validation (so-called validators) must stake their cryptocurrencies to increase the chance of generating a block.
In fact, the people who generate the blocks that validate transactions by adding them to the blockchain are the very validators who staked their cryptocurrencies. In return they receive a reward.
Stakeout at nodes
PoS-based networks work well when many holders of the network’s native cryptocurrency stake a lot of their coins.
For example, on Ethereum there are more than 28 million staked ETHs, out of approximately 120 existing ETHs in the world.
The original PoS simply requires validator nodes to stake their own cryptocurrencies on their own node, and to incentivize them to stake a lot of it, mandatory minimums are often introduced.
For example, to run an Ethereum validator node, 32 ETH, or almost $63,000, must be staked.
This effectively prevents small ETH holders from having a validator node, and thus staking-as-a-service was born, i.e. nodes that allow other coin holders to also add their own node when staking on the node.
Such a service is offered, for example, by many stock exchanges, or by decentralized services such as Lido.
Leased Proof-of-Stake (LPoS)
Staking-as-a-service on traditional PoS is offered by private initiatives that allow third parties to stake their coins on the node owned by the service provider.
However, there are some networks, such as Tezos and Waves, that are not based on simple PoS, but on LPoS.
So-called Leased Proof-of-Stake allows those with a validator node to borrow their coins from third parties, increasing the number of coins staked on the node and increasing the chance of blocks being generated and rewarded.
This also helps those who don’t have enough coins to open their own node to participate in staking using a native, decentralized methodology.
Naturally, those who lend their coins to a node receive in return a portion of the rewards the node receives, in proportion to the number of coins lent.
This way, even those who, for example, do not have the technical knowledge to launch and operate a validator node can participate in the staking process.
Thus, LPoS is a variant of PoS that naturally lends coins to nodes based on a decentralized system, as opposed to staking-as-a-service which is generally based on centralized services.
However, those who lend coins to nodes using LPoS can still withdraw them freely, precisely because the system is decentralized and thus the withdrawal cannot be blocked. In fact, the rented coins never actually leave the wallet of the user, who merely links the node to his wallet, without transferring his coins to the node.
Delegated Proof of Stake (DPoS)
There is actually also a third variant of Pos, namely the so-called Delegated Proof of Stake (DPoS).
In DPoS, validator nodes are selected through a kind of election, throughout the network, thanks to a system of representative democracy.
Votes are cast by users by staking their coins.
The rationale behind such a strategy should be found in the fact that by using far fewer validators, consensus can be reached more quickly. This makes the validation of transactions faster. For example, the Tron network is based on DPoS and is now even preferred for USDT transactions, for example.
In fact, Ethereum has shown that PoS alone cannot really reduce transaction fees, while Tron has shown that DPoS can significantly reduce them.
While the average average fee per transaction on Ethereum has been around $3 lately, on Tron it is around $0.1, making the difference very clear.