A Way to Solve the Scalability Problem of Decentralized Finance
Delegated Proof of Stake (DPoS) is an on-chain form of governance that provides a liquid, representative democracy with token holder suffrage. It compromises on the decentralization of block production in order to achieve scalability. It still achieves the three goals of decentralization: censorship resistance, openness, and no single point of failure.
- Distributed ledgers are difficult to scale
- Most “decentralized” systems like Bitcoin and Ethereum aren’t truly decentralized; Big entities control large portions of producers in the network
- Need a compromise to the scalability trilemma
The Scalability Trilemma:
Any blockchain system in which every node validates every transaction can have only two of three potential properties:
1. Decentralization of block production (DBP): ensures that any given party cannot alter the database
2. Safety: cost of mounting a Byzantine attack that affects liveness or transaction ordering
3. Scalability: number of transactions per unit of time that the system can process
How DPoS Works:
- Concentrates block production in the hands of a few known and trusted entities
- Those who hold the network token are able to cast votes to elect block producers. Votes are weighted by the voter’s stake.
- Users can also proxy their voting power to someone else.
Self-Funding Through inflation:
- For Bitcoin and Ethereum, miners receive block rewards as compensation for validating the blockchain. When these run out, they will be supported by fees alone.
- For DPoS networks, inflation is used to pay block producers to provide infrastructure.
- Token holders vote on a max annual inflation rate, how much of that is paid directly to block producers, and how much of it is put into smart contracts to fund projects.
- DPoS is more scalable than proof of work or proof of stake blockchains
- Users can fork if they disagree with the majority
- A much wider group of computers can participate in block production
- Token voters can take into account more than one metric of decentralization
- Fixed number of block producers means block producing power doesn’t concentrate
- If validators start behaving badly the token holders can take their authority away
- DPoS can be seen as a form of controlled semi-centralization
- There has been no universally agreed upon number of block producers or level of decentralization
- Places more requirements on token holders to monitor the health of the network
- The standard host of blockchain problems: bribing attacks, attacks at scale, block producers colluding, and the nothing-at-stake problem