Why the Flaws of PoW and PoS Led Aelf to Use a Different Governance Method (DPoS)
Cryptocurrencies represent a new financial system praised for its ability to escape the need for central parties and intermediaries. Many of the current cryptocurrencies are decentralized, meaning they allow financial transactions to occur between peers in a network in which everyone is equal.
To create a system that is not only free from central parties, but also safe and secure, the industry’s brightest minds had to conceive solutions to ensure network integrity.
In today’s landscape, cryptocurrency transactions are often carried out through what’s known as proof-of-work (PoW) or proof-of-stake (PoS). These are two methods of governance that incentivize users to take a share of the responsibility that would otherwise be handled by a financial institution.
These methods aim to reduce the risk of spam, denial of service attacks, and other malicious actions that could affect the network. While both methods have proven that it is possible to carry out transactions in a decentralized ecosystem, neither are without fault.
As is the nature of the cryptocurrency industry, new solutions are constantly being employed and experimented with. One such solution is known as delegated proof-of-stake (DPoS). It aims to serve as a remedy to many of the faults that exist in other blockchain governance models.
Understanding the issues with Proof-of-Work
Proof-of-Work (PoW) is a governance method that is utilized by Bitcoin and several other cryptocurrencies. Its purpose, in this context, was outlined in the whitepaper for Bitcoin in 2008.
However, the actual method itself predates the world’s first cryptocurrency. When discussing blockchain, the main goal for a system using PoW is to incentivize users to keep the platform safe.
At a basic level, PoW functions by handling transactions together in ‘blocks.’ Each block is verified by users (known as miners) that operate network-connected devices (nodes). The mining process is resource intensive as each miner must let their device solve complex mathematical equations.
The first miner to solve the equation is given a financial reward in the form of the cryptocurrency they are mining. Then, the verified block is added to the ‘chain’ and verified by other devices in the network.
One of the major issues with this protocol, however, is how expensive it is. In a system like Bitcoin, the processing power required to handle the network’s transactions increases as the network grows in popularity. For this reason, findings in early 2018 showed that Bitcoin could consume as much energy as the entirety of Austria by 2019.
Another functional drawback to this method of governance is that it is slow when used on a large scale. When platforms like Bitcoin grow in popularity, they also take a hit in terms of transaction speeds and increased transaction costs. These serve as major obstacles when it comes to using cryptocurrencies in an everyday capacity.
Proof-of-Stake is not without its own faults
Proof-of-Stake (PoS), on the other hand, is a governance protocol that is often praised as an alternative to PoW. It addresses many of the energy cost-related issues that PoW struggles with through some key governance changes.
In this system, an algorithm is used to allow a cryptocurrency’s blockchain network to reach consensus through a deterministic selection process. The protocol elects a user to handle the next block of transactions that is added to the chain.
PoS gets its title from the fact that participants are assigned a score based on factors like how much of a stake they hold in the network (meaning how many tokens they own), as well as how often they access their holdings.
The algorithm then weighs these factors each time when making its decision, making it more likely for large token holders with unmoved holdings to be selected. However, it is still possible for other users to be selected in the process.
Functionally, PoS proves an effective method to solve several governance issues. However, it is not without its faults. PoS can often prove difficult to implement, it could theoretically lead to wealth concentration, and it hosts a cast of other potential issues such as the “nothing at stake” problem.
Understanding Delegated Proof-of-Stake (DPoS)
Delegated Proof-of-Stake (DPoS) is a governance method that is becoming increasingly popular as a way of providing the needs of a decentralized digital currency without the drawbacks of other methods.
DPoS is an improvement to the PoS protocol that works by allowing a network’s users to elect representatives. These representatives are users that ensure transactions are confirmed without wrongdoing. The entire process is open and transparent, and the community always has the ability to elect new delegates.
Rather than issue rewards in the same way as a traditional PoS protocol, this governance system typically only rewards the top delegates. With the hopes of earning financial reward for their services, there is always an abundance of users that wish to serve as delegates. This allows the community to have many alternatives if an elected representative fails to uphold the network’s integrity.
Why Aelf uses DPoS
Thanks to a voting community being encouraged to participate and understand the system, DPoS is often referred to as a model for digital democracy. It is an effective governance method due to its ability to incentivize good behavior and remove the presence of malicious actors.
As the leading decentralized cloud computing blockchain network, Aelf aims to stand at the forefront of the cryptocurrency movement by leveraging new technology and protocols to offer the best experience for users.
Using DPoS, Aelf allows token holders to benefit from smooth and trustworthy blockchain governance. The model also allows developers to make customizations to meet their own needs.
Further, thanks to full nodes that are run on cloud servers and each smart contract being run on its own blockchain, Aelf offers resource segregation and maintains high performance across the network at all times.
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