What Is Leased Proof of Stake (LPoS) and How Does it Work?

One of the key foundational components of blockchain technology is the consensus mechanism. These are mechanisms utilized by blockchains in authenticating and verifying cryptocurrency transactions and adding blocks to the network.

Further, it guarantees that every transaction on the blockchain is recorded and that every node on the network has access to a copy of transactions that have been verified using the process.

The first consensus algorithm was created by Satoshi Nakamoto — the founder of Bitcoin — in 2008 and is known as Proof-of-Work (PoW). A pool of nodes is drawn at random by a PoW algorithm to serve as transaction validators. Proof-of-Stake was created as a response to the limitations of PoW which are time and energy consumption. It involves a network of validators and the odds of being selected increase with increasing stakes.

This article discusses Leased Proof-of-Stake, a modified variant of Proof-of-Stake that enables users to have the option of leasing their share to blockchain validators. In exchange, mining nodes provide the lessor with a portion of their profits.

A Study on Leased Proof of Stake

To provide a better context for Leased Proof of Stake, it is important to understand what Proof of Stake (PoS) is. The key component of all the consensus mechanisms is proof of stake. Using individuals referred to as validators, the initial proof of stake system, created in 2012, employs staking to generate and validate blocks of transactions.

To participate in block verification, validators are required to stake. For instance, in ETH 2.0, a user will need to deposit and lock up at least 32 ETH to become an Ethereum validator. Thus, to improve their chances of validating a block and receiving a reward, users have to stake more cryptocurrency.

By enabling users to lease their stakes to other users known as validators, Leased Proof of Stake (LPoS) seeks to outperform the conventional Proof of Stake (PoS) model by enhancing the validator’s capacity to create new blocks. In exchange, the lender gets a portion of the transaction fee that the validator is paid. Basically, LPoS is a novel approach to benefit from mining without actually needing to mine.

Note: Staking is the process of locking up a specific quantity of cryptocurrency for a fixed period.

Features of Leased Proof of Stake

• Balance Leasing: By leasing money from their wallets or any other cold storage to miners, users can benefit passively from using LPoS.
• Fixed Tokens: In LPoS, tokens are not added to the network through mining. Rather, tokens can be leased and fixed. Tokens that have been leased are locked in the accounts of their leaseholders and cannot be exchanged or transferred unless the owner terminates the lease.
• Decentralized: The majority of blockchains offer rewards to users who join mining pools, which leads to a centralized structure. However, in LPoS, rewards are divided evenly according to the amount staked, negating the need for a mining pool. Additionally, leasing adheres to a Peer - to - peer protocol to prevent intervention from third parties.
• Rewards in place of transaction fees: Contrary to other blockchains, LPoS rewards transaction fees to miners instead of block rewards.

How Does Leased Proof of Stake Work?

The coin owner must first create a lease transaction, in which they must include the recipient node address and the number of coins they wish to lease. Leasing can always be stopped by entering a cancel lease transaction.

The coin holder retains complete control over the leased coins. Although the lessor can link the coins to the nodes they want to lease from, the coins never leave their wallet. The coins do not go to the node; instead, they simply remain unusable and cannot be exchanged or transferred until the lessor ends the agreement. Because a node has a greater chance of being chosen to create the next block based on the large amount it is leased to, LPoS allows leaseholders to take part in the consensus process.

Further, the node compiles the pending transactions into a block after winning and the transaction fees are subsequently given to the winning node as remuneration. The node operators distribute a portion of their node earnings to their lessor after receiving them. Thus, the lessor receives rewards based on the amount leased.

How to Execute LPoS Transactions

The token holder must establish a lease transaction, and provide the destination address (node address), and the token amount they wish to lease.

The LPoS employs two different types of transactions:

• To start the leasing process, a lease transaction is executed.
• To stop the leasing process, a lease cancellation transaction is executed.

Examples of Blockchains that Utilize LPoS

WAVES

The WAVES blockchain platform uses the LPoS mechanism, and in this case, the lessor needs 1,000 WAVES to take part in creating blocks. The node balance may be empty if enough token holders choose to lease their coins; as a result, 1000 WAVES are needed to create a block. The lessor will be paid a percentage of the node’s block production rate once the node has been chosen.

NIX

The LPoS method used by NIX is a permissionless leased staking mechanism, which enables users of NIX to stake their coins using a different wallet (third party) without encountering the usual trust problems between the merchant/third party and the owner. This allows third parties that provide staking services to dependably get a stake fee incentive based on a leasing smart contract that the owner has signed.

Benefits of Leasing to Token Holders

• With LPoS, token owners can lease their tokens to nodes and receive a portion of the payout as payment.
• Lessors will be able to take part in the process of creating new blocks by using LPoS because Waves nodes are more likely to be chosen to create the next block when a larger quantity is leased to them. If that node is chosen, the lessor will be compensated.
• When a user first begins leasing tokens, the tokens are locked and kept at the same address under the complete ownership of their owner (they are not transferred to the node, they just remain unspendable until the lease is canceled by the lessor).

Benefits of Leasing to the Node Owner

The leased tokens can be used by nodes to create blocks and the node owner or lessor receives the mining reward.

• More coins leased to a node means more mining power, which increases the likelihood that it will add blocks to the blockchain.
• In line with his requirements, the node owner may decide the percentage of rewards the lessor receives.
• The likelihood that a node will be chosen to create the next block will increase based on the amount leased.

Benefits of Leased Proof of Stake (LPoS)

• The validators in a Proof of Stake network are chosen according to their stake. The fairness of the system when some nodes are continually chosen may be questioned as a result. However, in LPoS users can potentially increase their chances of getting selected when they accept a lease from another user.
• By renting out their limited tokens to full node owners, LPoS enables minor token holders to make money. Thus minority token owners receive a portion of the revenue made by the entire nodes.
• Tokens that have been leased are automatically locked and cannot be transferred or traded. While the lessor is unable to use the locked monies, they do have the option to terminate the lease and release the leased funds for use.
• A mobile phone can be used to initiate a lease deal. With the assistance of phone users, a small number of nodes may now complete a task that formerly required many nodes with significant computer power, thereby saving energy.
• Since just a small number of nodes are engaged in verifying a transaction at once, LPoS-based systems are quick and effective.

Downsides of Leased Proof of Stake (LPoS)

On the LPoS, where users lease to a single full node, heinous acts can be planned. This node has an advantage over other nodes because it will always be in front of the validators’ pool and favored to validate blocks of transactions.

Further, leased proof of stake results in a situation where a select few nodes are in charge of the network, otherwise known as centralization. Users have queried the authority that LPoS bestows upon node owners to have the exclusive right of sharing a percentage of the rewards. It is believed that this defeats the purpose of decentralization within the network.

Also, like any new technology, LPoS has its flaws, including uncertainty and a lack of restrictions that limit usage nevertheless, its advantages outweigh the disadvantages.

Conclusion

In the blockchain, a consensus algorithm is essential. Reaching consensus among network users is helpful. It enables the security and maintenance of network operations. Despite its popularity, PoW has witnessed poor adoption among developers due to its high energy requirements and poor processing speed.

In solving these challenges, Proof of Stake attracted the interest of networks as large as Ethereum to provide users with more advantages, such as balance leasing, passive income generation, speed, and secure transactions; LPoS improves PoS’s functions and efficiency.