#1: Nuances of Proof-of-Stake

This newsletter is supported by Chorus One, an operator of validating nodes and staking services on Proof-of-Stake networks.

Felix Lutsch
Aug 10, 2018 · 5 min read

Opinions & Observations

Tezos’ Liquid Proof-of-Stake

People often compare Tezos’ delegation mechanism to Delegated Proof-of-Stake (DPoS) blockchains such as EOS and Lisk etc. This has led to Jacob Arluck from the Tezos Foundation coining the term Liquid Proof-of-Stake (LPoS). His article compares Tezos delegation to DPoS systems and shows how the two systems differ going into some data from the Tezos blockchain and deriving implications for governance. One of the main takeaways is that DPoS blockchains require token holders to elect a pre-defined number of block producers, whereas in Tezos, delegation is optional and there is no limit to the number of bakers (validators) that may participate.

In my opinion, delegation is essential to Proof-of-Stake, as only a small portion of token holders will have the resources and/or technical capability to run a validating node themselves. The important consideration in this context is how delegators are incentivized to get involved to mitigate the formation of cartels and other problems arising from naive PoS protocol designs.

Observations on Tezos Delegation

In her excellent article Meltem Demirors dives deeper into the Tezos’ delegation ecosystem explaining the process and taking a closer look at some of the already available data. She concludes that Tezos seems to have a fairer distribution of tokens compared to other crypto projects by comparing Gini coefficients, a measure usually used to model income inequality in economies.

She goes on to compare Tezos’ delegation to proxy voting and delegation services to fiduciaries and political parties due to the on-chain governance mechanism that transfers voting rights from delegators to bakers. Meltem introduces the concept of “activist token holders”: parties that aim to influence the decision-making of a blockchain network and explains her teaming up with the Tezzigator team to become just that.

I share the view that on-chain governance and delegation results in validators turning into some form of a political party, although I do believe that delegators in on-chain governance protocols need to at least have the ability to cast governance votes themselves should they not agree with their validator on specific issues. This is how the Cosmos team is striving to implement their governance, with delegators actively having to override their validators’ decisions should they disagree.

Differences between the Proof-of-Stake Behemoths

Another interesting exchange took place when Ethereum’s Chief Scientist Vitalik Buterin took to Reddit to explain the differences between Cardano’s Ouroboros and Ethereum’s Casper Proof-of-Stake algorithms. His answer got cross-posted to Cardano’s Subreddit where Charles Hoskinson, CEO of IOHK and founder of Ethereum and Cardano ;), delivered a reply to Vitalik’s assessment with the discussion seemingly ending with Vitalik clarifying his statements. Almost two weeks after this exchange, the rebuttal from the Cardano team arrived in blog post format on the IOHK blog published by Prof. Aggelos Kiayias, IOHK’s Chief Scientist to which Vitalik responded once again on Reddit.

This exchange shows once again how nuanced the problem statement of Proof-of-Stake is and how much implementations will differ between projects. Leaving the crypto bear market saltiness aside, the one thing that becomes apparent from this exchange are the differences in how teams are approaching the PoS problem statement. On one side there is the pragmatic, constantly evolving, “grassroots” Casper approach from the Ethereum and Rchain community and on the other side there is the academia-driven, clearly defined peer review IOHK procedure. Both protocols still have to prove in a real-world setting, since blockchain design after all is simultaneously a mechanism design and distributed systems problem, which makes part of the discussion seem pointless.

On this note, I encourage everyone interested in PoS not to think too naively about implementations and their implications and to make use of the growing list of research and contributions that other parties are doing in this space. While calling out bad actors makes sense, neither Ethereum nor Cardano belong to this group and the best way to solve these hard problems is through open-source collaboration.


News & Updates

Polkadot PoC-2 and the Launch of the First Parachain

After a successful first Polkadot Proof-of-Concept that comprised of a testnet where the functionality of the Polkadot Relay Chain, which is going to connect blockchains and coordinate transactions, was demonstrated, PoC-2 followed shortly after. In this release, new features such as staking rewards and slashing are going to be tested. Another important step is the introduction of parachains, the blockchains that are connected by the Relay Chain, of which the first one was already deployed on a local testnet by Polkadot’s Robert Habermeier. I am excited about the progress that the Polkadot team is demonstrating and feel confident for the targeted Q3 2019 launch of the protocol.

Cosmos Gaia-7000 Testnets

The Cosmos community went forward with another set of public testnets to bring the protocol closer to launch with the start of the Gaia-7000 series. On these testnets over 100 validators, including our very own Chorus One validating node, are maintaining the network, checking for bugs and testing new features. You can follow the progress of the testnets using this cool tool developed by our validator colleagues from Figment Networks.

The incentivized, adversarial testnet series dubbed “Game of Steaks” meanwhile is still on the horizon and the launch of the Cosmos Hub mainnet will hopefully be happening in Q4 2018.

If you are unsure what testnets are, what purpose they solve or want to find out how Cosmos (and other projects) are leveraging their power, have a listen to this recent, highly informative podcast from the Zero Knowledge team featuring Cosmos CTO Ethan Buchman. Another pastime while waiting for the Cosmos Hub launch might be to check out the new paper on the Tendermint consensus protocol featuring a fully formalized specification, which serves as the basis for Cosmos’ Proof-of-Stake system.

Ethereum’s Road to Shasper

While the sudden change in Ethereum’s Proof-of-Stake roadmap is causing confusion in some instances, plans to merge sharding and Casper into a combined effort are rapidly evolving and also led to the creation of the name and meme Shasper, which may or may not relieve confusion about what is going to happen to Ethereum in the coming months and years. Something that definitely clarified the benefits of combining sharding and Casper was Vitalik’s answer to another discussion around the Casper FFG delay arising from the roadmap update.

NuCypher Staking Economics

The final update of this newsletter issue is about the release of an initial proposal of staking economics for the proxy re-encryption-based project NuCypher. The proposal features well-thought-out incentives to encourage stakers to commit to the platform early and long-term, deriving assumptions from observations of other stake-based and inflation-financed crypto projects.


Opinions expressed are my own and do not necessarily reflect the opinions of Chorus One. All content is for informational purposes only and not intended as investment advice.
https://twitter.com/chorusone | https://twitter.com/StakingEconomy

Staking Economy

A twice monthly recap of news and observations focused on…

Felix Lutsch

Written by

Research Analyst @ChorusOne. Editor @StakingEconomy. @FelixLts.

Staking Economy

A twice monthly recap of news and observations focused on Proof-of-Stake networks.

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