Many consider the Delegated Proof of Stake (DPoS) algorithm to be a more efficient and democratic version of the previous Proof of Stake (PoS) mechanism.

Both DPoS and PoS are used as an alternative to the consensus algorithm known as Proof of Work (PoW) as PoW requires a lot of external resources. Proof of Work algorithm uses a lot of computational work in order to maintain a stable and transparent distributed ledger. On the contrary, PoS and DPoS require less resources and are by design more sustainable and environmentally friendly. To understand how Delegated Proof of Stake works, you need to first understand its predecessors, Proof of Work and Proof of Stake.

Proof of Work (PoW)

Most cryptocurrencies are based on a distributed ledger called blockchain and the Proof of Work (PoW) algorithm was the first consensus algorithm to be used. It was incorporated into the Bitcoin protocol as a core component responsible for generating new blocks and keeping the network secure (through the process of mining). Bitcoin was proposed as an alternative to the traditional, centralized and inefficient global monetary system.

The Proof of Work algorithm provided a viable consensus protocol that made the process of transferring money headed by a central authority unnecessary. It is a decentralized instant payment settlement system that operates on a peer-to-peer economic network (without the need for a third party) which removed the need for intermediaries and reduced the overall cost of transactions.

Along with other types of nodes, the Proof of Work system is maintained by a network of mining nodes that use specialized hardware (ASICs) to attempt to solve complex cryptographic problems. On average, a new block is mined every 10 minutes. A miner is only able to add a new block to the blockchain if they can find the correct solution to that block. In other words, a miner can only do this after completing the Proof of Work, which in turn rewards them with newly created cryptocurrencies and all transaction fees for that particular block. However, this comes at a high cost as it requires a lot of energy and failed attempts. Furthermore, ASICs are very expensive.

Besides the effort to maintain the system, there are long-standing questions about how far PoW can be implemented, especially in terms of scalability (a very limited amount of transactions per second). However, PoW blockchains are considered the most secure and reliable and remain the standard for fault-tolerant solutions.

Proof of Stake (PoS)

Proof of Stake consensus algorithm is the most popular alternative to Proof of Work. Proof of Stake (PoW) systems are designed to solve some of the inefficiencies and problems that typically arise on Proof of Work (PoW) based blockchains. Specifically, they address the costs associated with Proof of Work mining (power consumption and hardware). Basically, Proof of Stake blockchains are secured in a specific way (not randomly) and there is no mining in these systems and the validation of new blocks depends on the number of cryptocurrencies that are staked. The more cryptocurrencies someone stakes, the higher the chances of being chosen as a block validator (also known as minter or forger). While PoW systems rely on external investments (power consumption and hardware), the blockchain is secured by internal investments (the cryptocurrency itself). Additionally, PoS systems make it very expensive to attack the blockchain based on them because a successful attack requires ownership of at least 51% of the total cryptocurrency in it and failed attacks result in huge financial losses.

Despite the volatility and compelling arguments in favor of Proof of Stake (PoS), such systems are still in their early stages and have yet to be tested on larger scales.

Delegated Proof of Stake (DPoS)

The Delegated Proof of Stake (DPoS) consensus algorithm was developed in 2014 by Daniel Larimer. Bitshares, Steem, Ark, and Lisk are some of the cryptocurrencies that use the Delegated Proof of Stake consensus algorithm.

Delegated proof-of-stake blockchains rely on a voting system where stake holders outsource their work to a third party, meaning they are able to vote for a small number of delegates who will secure the network on their behalf. Delegates can also be referred to as witnesses and are responsible for achieving consensus during the creation and verification of new blocks. Voting power is proportional to the number of coins held by each user and the voting system varies from project to project. However, in general, each delegate submits an individual proposal when a vote is requested and the rewards collected by delegates are usually shared proportionally with the relevant voters.

Therefore, the DPoS algorithm creates a voting system that is based directly on the reputation of the delegates. If an elected node misbehaves or does not work efficiently, it will be quickly kicked out and replaced by another node.

In terms of performance, DPoS based blockchains are more scalable and are able to process more transactions per second (TPS) compared to PoW and PoS.

DPoS vs PoS

While PoS attempts to solve the shortcomings of PoW, DPoS looks to simplify the block production process and this is why DPoS systems can process larger amounts of blockchain transactions quickly. As of now, DPoS is not used in the same way as PoW or PoS. As of now, Proof of Work (PoW) is still considered the most secure consensus algorithm and as such, most money transfers occur.

PoS is faster than PoW and potentially has more use cases. DPoS limits the amount of stakes a block producer can hold when they are elected and its actual block production is predetermined, unlike the competition-based PoW system. Each witness gets a turn when producing blocks. Some argue that DPoS should be considered a proof-of-authority system.

Conclusion

The Delegated Proof of Stake (DPoS) algorithm is very different from the Proof of Work (PoW) algorithm and even the Proof of Stake (PoS) algorithm. The incorporation of staker voting serves as a means of determining and incentivizing honest and effective delegates (or witnesses).

However, the actual block production is quite different from PoS systems and in most cases offers higher performance in terms of transactions per second.