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Cryptocurrency Guide | Guides

What is Leased Proof-of-Stake (LPoS)? How Does It Work?

Author

Jay Solano

Tags

Reading time

5 mins
Last update

Author

Jay Solano

Tags

Reading time

5 mins
Last update

Author

Jay Solano

Tags

Reading time

5 mins
Last update

lpos

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Key Takeaways

  • LPoS offers a balance between decentralization and security, with passive rewards for participants. However, other mechanisms might be better suited for specific needs.
  • LPoS allows users with smaller holdings to lease their crypto to validators, boosting their stake and chance of earning rewards.
  • Users lease their crypto to validators, increasing the validator’s stake and their chance to create blocks and earn transaction fees. 

What is Leased Proof-of-Stake (LPoS)?

Leased proof-of-stake (LPoS) builds on the idea of proof-of-stake (PoS) but expands participation. In PoS, validators stake their own cryptocurrency to secure the network and earn rewards by creating new blocks. However, this can favor those with larger holdings. LPoS allows users with smaller amounts or those who don’t want to run a validator node themselves, to “lease” their crypto holdings to validators. This boosts the validator’s stake, increasing their chance of being chosen to create a block and share the rewards. LPoS offers wider network participation, passive rewards for lenders, and the flexibility to control your leased crypto.

How Does Leased Proof-of-Stake (LPoS) Work?

Leased proof-of-stake (LPoS) expands participation in securing blockchains compared to traditional proof-of-stake (PoS). In PoS, validators with more staked cryptocurrency have a higher chance of creating new blocks and earning rewards. LPoS allows users with smaller holdings to contribute. Here’s how it works:

  1. Token Lease: Users create a “lease transaction,” essentially lending their crypto to a chosen validator, specifying the amount and lease duration. Unlike traditional loans, the crypto never leaves the user’s wallet; they simply link it to the validator.
  2. Increased Stake, Increased Chance: The leased crypto gets added to the validator’s stake, effectively increasing their chance of winning the “block lottery” and creating new blocks.
  3. Consensus and Block Creation: Validators participate in the consensus process, and those with the largest total stake (including leased tokens) are more likely to be chosen to generate the next block. Winning validators validate transactions, put them into blocks, and earn transaction fees as rewards.
  4. Reward Sharing: Validators then distribute a portion of their rewards back to the users who leased them crypto, with the amount based on each user’s contribution. Leases can be canceled at any time, allowing users to regain control of their crypto.

This system offers several benefits: wider network participation, passive rewards for lenders, and the flexibility to control your leased crypto.

Benefits of Leased Proof-of-Stake

Leased proof-of-stake (LPoS) offers several advantages over traditional proof-of-stake (PoS) systems, making it an attractive approach for blockchain security. Here’s a breakdown of its key benefits and features:

  • Enhanced Decentralization: LPoS encourages wider participation in validating the network. Users with smaller holdings can contribute by leasing their crypto to validators, reducing reliance on a few large holders. This uses a more decentralized and secure system.
  • Reduced Entry Barriers: Unlike PoS where staking minimums might exist, LPoS allows anyone to participate. Users with less crypto can still earn rewards by leasing their holdings to validators, increasing the validator’s stake and their chance of earning block creation rewards.
  • Optimal Security: The broader participation in LPoS strengthens network security. More validators make it harder for attackers to gain control of the network.
  • Passive Income Generation: LPoS enables users to earn rewards simply by leasing their crypto to validators. This provides a passive income stream without the need to actively manage a validator node.
  • Retained Ownership: Users retain control of their leased tokens. By canceling the lease, they can maintain liquidity and withdraw their crypto at any time.

Features of Leased Proof-of-Stake

  • Balance Leasing: Leased tokens remain in the user’s wallet, not transferred to validators. Users can lease tokens directly from cold storage or hardware wallets for added security.
  • Decentralization: Rewards are distributed based on the total stake (including leased tokens), eliminating the need for centralized mining pools. LPoS also relies on peer-to-peer protocols, preventing third-party intervention in governance.
  • Unpredictable Block Generation: The system cannot predict who will generate the next block. However, validators with a larger stake (including leased tokens) have a higher chance of being chosen.
  • Fixed Tokens: Unlike PoS where mining creates new tokens, LPoS focuses on leasing existing tokens. The total token supply remains fixed.
  • Scalability: LPoS prioritizes on-chain scalability, aiming for efficient transaction processing without relying on secondary applications.
  • Reward Structure: Unlike some blockchains that offer block rewards in new tokens, LPoS rewards successful validators with transaction fees.

Leased Proof-of-Stake (LPoS) Alternatives

While Leased Proof-of-Stake (LPoS) offers an approach to blockchain security, it’s not the only option. Here’s a comparison of LPoS with some widely-used alternatives:

Consensus MechanismDescriptionBlockchain Networks in Use
Proof-of-Stake (PoS)A standard staking system where token holders directly participate in validation.Ethereum 2.0, Cardano, Polkadot
Delegated Proof-of-Stake (DPoS)A hybrid of PoS and voting. Users elect validators (“witnesses”) to create blocks.EOS, Tron
Proof-of-Authority (PoA)Relies on pre-approved validators for efficiency.Ethereum’s Kovan Testnet, VeChain
Proof-of-Work (PoW)Traditional mining uses computational power for validation.Bitcoin, Litecoin

Other Alternatives

  • Proof-of-Space (PoSpace): Uses storage space for validation, promoting eco-friendliness (Chia)
  • Proof-of-History (PoH): Provides timestamps for transactions, often used alongside PoS/PoA (Solana)

Choosing the right mechanism depends on factors like:

  • Decentralization: How much participation is desired?
  • Scalability: How efficiently can the network handle transactions?
  • Security: How resistant is the network to attacks?
  • Energy Efficiency: How much energy does the system consume?

LPoS offers a good balance between decentralization and security, with the added benefit of allowing users with smaller holdings to participate. However, depending on the desired network characteristics, other mechanisms might be better suited for specific use cases.

Final Thoughts

Leased Proof-of-Stake (LPoS) addresses the limitations of traditional Proof-of-Stake by allowing anyone to contribute to blockchain security. This system increases participation, lowers barriers to entry for earning passive income in crypto, and keeps your holdings under your control. While LPoS might not be ideal for every blockchain, it offers an approach for enabling a more secure and accessible future for these digital networks.