What Is Liquid Proof-of-Stake and How Does It Work?

Many variations of Proof-of-Stake have been created over the years. Leased Proof-of-Stake (LPoS) is one of them, and while having many pronounced advantages, it is employed quite rarely. This rarity mostly has to do with the fact that, being an example of early attempts to democratize staking, LPoS seemed too complex for many users, and there were other competing consensus mechanisms at the time that tackled the same issues with greater simplicity while offering more user-friendliness.

This article explores LPoS, its basic mechanics, the reasons why it did not catch on, unlike some of its contemporaries, and whether there is a place for some version of it on the blockchain scene today.

LPoS in a Nutshell

Leased Proof-of-Stake (LPoS) is a version of the Proof-of-Stake consensus mechanism. It allows token holders to lease their cryptocurrency stakes to network validators to increase their chances of being selected for creating new blocks (and thus receiving more rewards). This way, holders can earn a portion of the transaction fees without actively participating in block validation. This, however, still helps maintain network security and consensus, all without running a full node.

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Under LPoS, the leased tokens remain under the control of the token holder and cannot be transferred or traded by the node operator. Instead, they just give the node a greater chance of being selected to produce the next block. Moreover, token holders can delegate their assets from cold storage, which massively mitigates the risk of online attacks.

How Did LPoS Come to Be?

LPoS was designed and first used by the Waves platform back in 2017 (though the platform itself has been active since 2016). It allowed regular users who could not afford or did not want to run full nodes to participate in the block generation process by leasing their WAVES tokens to network nodes. Since most blockchains required significant amounts of tokens to be staked in order to run a node as a mechanism to ensure higher professionalism of validators, people who couldn’t afford to buy so much were effectively cut off from staking. LPoS became one of the first solutions to lower this threshold and enable individual users to earn rewards from staking their tokens. 

The introduction of LPoS on Waves was coupled with the Waves-NG protocol, which further optimized the network’s capacity for handling transactions. Back in the day, this approach that had democratized staking for millions of people worldwide ended up somewhat of a breakthrough and became a major step forward for blockchain technology.

Still, Leased Proof-of-Stake was a somewhat complex solution. As more straightforward and user-friendly options became available to potential delegators roughly at the same time (most notably, DPoS or Delegated Proof-of-Stake, which currently dominates the crypto market), LPoS remained quite a rare consensus mechanism, so there are not too many blockchains that use it. Aside from the aforementioned Waves platform, it was also the cornerstone of Nix, which employed a permissionless staking mechanism enabling users to stake via a third-party wallet, which then took responsibility for the staking itself.

Despite the remarkable efforts of its creators, the concept of LPoS remained quite niche, and its adoption rate was very much limited. The mechanism’s unique requirements and the specific benefits it offered were not in line with the goals or technical capacities of many blockchain projects. Nevertheless, it still has its supporters among the broader blockchain community, and there still might be at least a theoretical chance for it to make a dramatic comeback, albeit in some reimagined form, as market demand for Leased Proof-of-Stake in its current form is questionable at best.

Leased Proof-of Stake: Pros and Cons

LPoS is essentially an iteration of PoS, yet the leasing aspect brings about additional challenges like liquidity impact and the complexity of the leasing process. Still, it has its upsides as well, although not all of them are unique to this consensus mechanism. 

Advantages of Leased Proof-of-Stake

• As LPoS enables more token holders to participate in consensus, more tokens get locked, and the overall security of the blockchain network increases.

• LPoS is more democratic compared even to regular PoS. As tokens are leased to larger nodes rather than straightforwardly delegated, the distribution of rewards becomes more even.

Disadvantages of Leased Proof-of-Stake

• The mechanism of token leasing wasn’t very user-friendly, and the concept of leasing might be challenging for certain people to understand.

• Leasing tokens to large nodes could potentially increase centralization in the network, effectively creating several super-loaded entities that could jointly hijack the network under certain circumstances.

• The token’s liquidity may deteriorate if too many tokens are locked until the end of the lease.

Comparing LPoS to Other Consensus Mechanisms

To put things in perspective, one should compare Leased Proof-of-Stake with other major consensus mechanisms in blockchain tech. Even though it is a variation of Proof-of-Stake, there are noticeable differences that make one or the other more advantageous in certain areas. Both of them are, however, quite different from the first consensus mechanism of blockchain tech, Proof-of-Work.

The table below summarizes the differences between Leased Proof-of-Stake, Proof-of-Stake, and Proof-of-Work.

Prospects for the Future

As was noted above, LPoS was a massive step towards democratizing staking and making it more accessible. The accessibility of staking was one of the biggest hurdles for its mass adoption as it put network decentralization at risk. On the other hand, the minimum stake was deliberately made high to ensure that the nodes are run by duly motivated entities that could afford to troubleshoot and treat their work responsibly. LPoS was one of the ways that this conundrum was solved.

It, however, introduced other risks. Many people leasing their tokens to a large node could overpower said node for a certain period. Moreover, since it was the early days of PoS, participating in such activities required one to be tech-savvy, while an average PC user could find the process of staking unacceptably complex and convoluted. 

While there is nothing wrong with Leased Proof-of-Stake from an economic standpoint, all those disadvantages seemed to dissuade many users from participating in such activities, which in turn defied the mechanism’s main idea, which was to make staking available to the masses. The emergence of somewhat similar concepts, such as Delegated Proof-of-Stake (DPoS) that didn’t require such complexities while ensuring the non-custodial nature of staking, making staking accessible to individuals, and ensuring proper network functioning on the same level or even better, effectively made LPoS obsolete. Leasing went on a different layer of blockchain ecosystems, entirely ceding its place to delegation.

That being said, LPoS still has its proponents, though there are not too many of them compared to the supporters of DPoS. The question of whether this concept from the previous decade can adapt to the new realities and be properly reinvented to compete with the highly successful PoS solutions of today remains open.