Enter LUKSO: mainnet and staking
In this article we’ll go over LUKSO’s Proof-of-Stake consensus protocol, in a short but intuitive way so you can explain it to your friends and family.
(written by António Pedro Silva)
As mentioned, we will talk Proof-of-Stake in the context of the LUKSO blockchain, which uses the LYX token to fuel the protocol. However, it’s important to keep in mind that LUKSO is an EVM-compatible blockchain. For that reason, everything in this article also applies to Ethereum.
Like its predecessor Proof-of-Work, Proof-of-Stake is a consensus protocol. It helps a group of people act together and agree on making the same decisions, without previously trusting each other or any central authority. Practically, the goal is to establish one single, acknowledged version of the Blockchain and make sure nobody is cheating on it.
The only trust assumption in Proof-of-Stake is that participants value their LYX and don’t want to lose it.
Think of one validator as the right to one chair in the consensus parliament (image above). It’s not an entity, and it’s not a computer. You gain the right to this chair by lending 32 LYX to the protocol, and if you behave against the protocol rules, you lose your chair and your money. If you don’t, your chair is yours until you want to quit the political life.
In order to participate (vote) as member of parliament, you need a computer program. The same program can handle many votes at the same time; each vote corresponds to one validator. In other words, one program can manage many chairs in the parliament. This program is called the client, and the machine where it runs is called the node.
By now you might be wondering: what’s in it for me, to make me want to acquire validator chairs? Well, you get paid for your duties in parliament.
When you stake through entities like exchanges & staking pools, you are delegating your stake, and subsequently your vote, to a third party provider who takes care of voting for you. You trust it will always vote in time and according to the rules, so you split the reward with them. Akin to how politics work IRL, right? Most of us are simply too busy with our daily duties and lack the time to be active participants within the political sphere, so we choose the person who (we believe) best reflects our point of view and delegate our voting power as citizens.
The alternative to staking pools is to have a machine running 24/7, and install client software on it to manage your validators. In doing so you would become a node in the LUKSO network!🥇
That can be more profitable in the long run, and it is definitely better for decentralization, but there are risks involved. Keep reading, and you’ll find out.
Apparently, the consensus parliament would work the same way just by having free chairs for everyone and inviting users to freely participate. So why do we need 32 LYX for each validator chair? Because there needs to be something at stake. Otherwise, participants might get lazy or, even worse, maliciously vote for incorrect blocks that would spend or mint money out of thin air.
At this point, remember what the consensus parliament is for: globally deciding the content of the next page of the notebook. In other words, the next block in the blockchain. This includes validating the transactions that go in and accepting that some are postponed to the next block.
Penalties and Slashing
The whole idea behind human-participant networks is that humans will rationally choose whatever option is more profitable to them. For this reason, Proof-of-Stake relies on the fact that it is more profitable to collect rewards (from being a good actor) than to try and cheat the network for a potential “bounty”. If it ever stops being like that, actors will switch to acting maliciously and corrupt the network. All in all, there are no good guys, just strong enough incentives.
In the case of Proof-of-Stake, incentives go both ways: members of parliament get paid for doing their job, and get penalized when they don’t. For example, if a validator you control misses a vote, it gets penalized. The same happens if the vote is not valid. Penalties are small fines that can be easily recovered. They are applied to mistakes that can happen by accident, for example, in the presence of high network latency.
Slashing is a more severe type of penalty, applied when there’s a high likelihood the validator deviated from the rules on purpose.
One such event is called a double attestation, or double vote. It happens when a validator votes twice for different blocks in the same voting round. This behavior is not only extremely dangerous to the protocol, but it can be highly profitable to the offenders if done by a large enough number of validators. That’s why punishment must at least match the potential profit of acting maliciously.
Keeping participants’ funds locked inside a ‘safe’ in order to be able to punish them works pretty well, but is economically inefficient. This collateralized approach to consensus creates the threat of a loss, but prevents honest participants from utilizing their money to fuel automated market makers, lending protocols, and other economic activities, that would generate interest.
Liquid staking was created to tackle this issue. A new middleman entered the scene to collect your locked funds and give you a receipt (proof of debt) in return. The idea is that you could redeem this receipt at any time and get your money back. The middleman’s role was taken up by “staking pools”, using smart contracts to seal the pact in a trustless way. In exchange for this service, staking pools keep a small portion of your staking rewards.
Instead of depositing their ETH directly in the Proof-of-Stake protocol, users deposit their ETH with Staking Providers, who then proceed to deposit it within the Proof-of-Stake protocol. Source.
Proofs-of-debt became known as Liquid Staking Derivatives and were represented by tokens, with each Staking Pool issuing its own. For example, LIDO issued stETH in Ethereum. It looks like magic, but in fact, there are risks to it. Liquid Staking might seem like the 7th wonder of Crypto Finance, but the underlying value of the Staking Derivative token can fall apart if the Validators managed by the Staking Pool get slashed.
In this article, we presented an overview of the Proof of Stake protocol, and slightly touched on some of its intricacies. Staking can be a very profitable and safe investment and a way to contribute to a decentralized network. If its risks are understood, they can be mitigated, and participants can choose what’s best for them: either staking through a third party provider or setting up their own infrastructure.