Why are *Liquid* Proof of Stake Blockchains better than PoS for Businesses?

06.04.20 | Alex Davis

In our last article, we discussed the benefits of Proof of Stake (PoS) networks over Proof of Work (PoW) for business applications. However, there are several different types of PoS networks currently operating, each with their own pros & cons. One may think of PoS and it’s different variations as similar to ice cream. There are many different unique flavors of ice cream, but all of them are simply different variations of the same dessert. In this article we’re going to take a look at why a particular flavor of PoS called Liquid Proof of Stake (LPoS) is the one best suited for businesses.

To recap, the basic model of Proof of Stake (PoS) functions by having validators lock up part of their stake in the network, which acts to both incentivize good behavior and deter malicious behavior. The stake works as a form of escrow account. Typically, the larger the stake is, the larger the rewards for validation are. So, rather than expending resources to ensure proper behavior from nodes such as in PoW, PoS systems maintain proper behavior through economic means, by ensuring validators have skin in the game through the security deposit (the stake).

As mentioned, LPoS is a specific subtype of PoS. In order to validate transactions, nodes deposit their stake into the network which also acts as a built in security bond. If the node conducts any malicious behavior, they are punished by losing a part of their stake. LPoS also has no maximum node limits, which allows for more egalitarian access as anyone can set up a node. LPoS also has a built in upgrade mechanism with a rewards plan for implementing upgrades, which are voted on every 3 months. Lastly, not just nodes get to vote, but all users in LPoS have the ability to vote by delegating their votes to the owners of nodes who support their views.

Now that we have a general understanding of LPoS, let’s take a dive into just how LPoS provides the best PoS network for businesses.

Liquid Voting: Community Owned Voting with Liquid Representation

Liquid Proof of Stake is unique in the PoS ecosystem in that individuals may change their delegation to any validator without lockup restrictions or fees. LPoS may be thought of as similar to a representative democracy. A citizen votes for an elected official to represent them, and if they want to change their vote to a different representative they may do so at any time. At no point does the representative “own” their citizen, and good representatives will work hard to keep their constituents happy. The same relationship flows between those delegating, and the nodes who wish to receive delegations.

This method allows for everyone in the community to have a say in what happens with the network. If someone wishes for a certain protocol upgrade to be implemented, they may without restriction change their delegation to a node which supports the upgrade. This differs from other PoS networks, where in order to become eligible to vote a user must lock up their funds for 72 hours. On LPoS, every vote always counts.

Egalitarian Representation: Lower Barrier of Entry

As LPoS does not require expensive computer hardware, new nodes may enter the ecosystem and contribute to its security & decentralization without requiring tremendous amounts of capital. Hardware costs to set up a validator on a Delegated Proof of Stake (DPoS) network are estimated to be $40,000, while the Amazon Web Services (AWS) fees are estimated to cost almost $4,800 per month.

The only physical hardware an LPoS network requires is a decently modern computer (like a modern laptop). The largest monthly expense to keep a node running 24/7 is a minuscule $50 for electricity, a far cry from the $4,800 mentioned above. This guarantees a more decentralized, secure network.

Randomly Selected Validators

The node selection process is a crucial element for any blockchain network, and within PoS networks the node selection process differs. LPoS uses an election model to randomly choose which node will validate transactions. If a validator wants to increase their chances of being selected, all they need to do is add additional stake for their bond. The element of randomness ensures that smaller validators are also chosen, ensuring equal opportunities for all nodes.

Low Fee Structure for a Robust Network

Believe it or not, zero fees are not always a great thing and abuse of no fee structures can hamper a networks ability to function. In November 2019 a DPoS network with zero user fees was attacked by duping users to make useless transactions. This had overloaded the network and increased costs for companies utilizing the network by 100,000% during the time the network was congested.

To combat these types of network attacks, LPoS has an extremely low fee structure in place, with the average fee on LPoS costing just $0.0004. By having extremely low but not zero fees, LPoS facilitates a robust network where costs are low and distributed denial of service (DDOS) attacks are mitigated. Therefore, users may transact for almost free, while DDOS attacks would add generate a significant bill for the attacker. Similar low fee measures have been theorized in a bid to reduce the estimated 88 billion daily spam emails sent worldwide.

All of these different factors blend together to create a network perfect for business applications. Fusing together low fees, fairly chosen & open accessibility for new nodes, and egalitarian representation of all network participants, it is clear how LPoS takes the lead over other Proof of Stake networks.