Delegated Proof of Stake’s Stake in Crypto

To read Part 1 of this series, click DPoS: The Protocols.

For the sake of clarity, throughout this article, the primary designation given to those who commit and verify new blocks to the chain is Validator. Other names used interchangeably with validators are witnesses, block producers, super representatives, harvesters, consensus nodes, fishermen, and even bakers!

To meet the cryptocurrency demand of a 24/7 uptime network, the computation, memory, and security requirements of a global virtual machine or web-based delegated proof of stake (DPoS), or some form of DPoS consensus, has proven to be the optimal solution over proof-of-work and proof-of-stake thus far in blockchain development.

Earlier attempts at pure proof-of-stake were insufficient to meet the demands of enterprise-level blockchains.

  • A problem with securing this type of network is to guard against a 51% attack by individuals or groups who buy over half the tokens. It is a problem but not a great threat since anyone who performs a 51% attack risks the value loss of their tokens and trust for the platform, thus hurting themselves.
  • A second problem with PoS is scalability. If every computer that is on and connected to the network participates, the relays between these computers to validate transactions will not transmit optimally. Some personal computers may stake many tokens and are chosen often as a node validator to verify transactions but if their home networks are slow, the entire system lags. Imagine someone staking from a wallet on their mobile phone. Maybe when our devices are on a 6G network this will no longer be an issue to verify blocks.
  • The third problem with pure PoS is called ‘Nothing at Stake’. Normally blockchain miners within a Proof of Work environment are incentivized to forge the next block on the longest chain (official chain) due to the extreme electrical costs of being a witness to the consensus mechanism. Therefore, no bitcoin miner will attempt to gain credit for solving consensus puzzles on a shorter, illegitimate chain. For Proof of Stake, there are no opportunity costs involved with signing multiple chains and attempting to gain rewards from shorter chains each round. There are several solutions proposed for the ‘Nothing at Stake’ problem, but each will either introduce slashing penalties, require seasoning of staked tokens (at the detriment of new-comers), or use the transactions to build the blockchain and the senders are the miners (however this does not scale well).
  • A 4th problem with pure proof-of-stake is ‘Weak Subjectivity’. When a new node comes online, it must ask a trusted source about the latest hash. Most chains rely on existing nodes to communicate this info so new nodes are on the correct chain. Another option is to broadcast the correct hash by way of 3rd party oracle. Either way, it is a potential weakness that a large stakeholder could deceitfully override the correct chain with a false hash and cause every other node to point to an incorrect chain.
  • DPoS allows every token holder to participate in governance and rewards, however, only clearly identifiable entities with large stakes, highly secured computer/server equipment, protocol expertise, and 24/7 high-speed network uptimes can operate a block-producing node.

DPoS Validator Requirements:

DPoS protocols require various public identity requirements, staking levels, technical expertise, and hardware. An evaluation of requirements from protocols such as NEO, EOS, Waves, Tezos, Ark, Bitshares, and Loom required too many variables to list in this article. However, a common theme for most is a public identity that requires a website and some social media presence. Staking levels range from hundreds to hundreds of thousands of tokens; however, the monetary value will be discussed below along with hardware and network costs. Finally, public campaigning will encourage a diverse group of people to stake tokens, and a limited number of delegates with a larger stake will be responsible for transactions and creating blocks for a share of the block reward.

The technical requirements are surprisingly moderate and do not require much processing power to operate the node. The average minimum spec requirements are close to those listed below.

  • Most allow nodes deployed on Windows, macOS, or Ubuntu. Some even prefer a proprietary console such as Wave’s Docker.
  • 4 x CPU 24 cores (48 threads) @ 1.87GHz.
  • 16 GB RAM (EOS requires significantly more, 512 GB).
  • 1 TB SSD Storage. (EOS requires significantly more, 8 TB).
  • 100 MBps uplink.
  • 2 x CPU 28 cores (56 Cores & 112 threads) @ 2.50 GHz.
  • Failure tolerance/recovery backup.
  • HSM for bare metal servers.
  • System technical requirements.
  • Time requirements (24/7 Operation).

In general, most DPoS DLT systems advise their potential Validators in the same manner as Cosmos,

Validators must set up a physical operation secured with restricted access. A good starting place, for example, would be co-locating in secure data centers.

Validators should expect to equip their datacenter location with redundant power, connectivity, and storage backups. Expect to have several redundant networking boxes for fiber, firewall and switching and then small servers with redundant hard drive and failover. Hardware can be on the low end of datacenter gear to start out with.

We anticipate that network requirements will be low initially. The current testnet requires minimal resources. Then bandwidth, CPU and memory requirements will rise as the network grows. Large hard drives are recommended for storing years of blockchain history.

— Validators Overview Guide (Cosmos 2018)

Validator Compensation:

Compensation only matters after expenses to run a full node are accounted for, for example, VSystems lists hardware requirements as listed above; however, a comparable instance on Amazon Web Services’ EC2 with an instance i3 large makes a good virtual substitute. The AWS i3 large instance costs $200—$400 per month for 2 servers, and they estimate those costs will increase by 10% every 2 years. (Gadikian, 2020)

Depending on the size of the team, from hobbyist to enterprise-grade, and level of commitment, from a personal computer to a stand-alone bare metal server with HSM security, adequate computing power, redundancy, custom tooling, and more, costs can range from $50 per month to $10k per month. There are mid-sized teams validating whose expenses range from $2k — $8k.

For simplicity’s sake, let’s focus on the mid-sized Validator team for the average, using DPoS blockchain. Estimated costs:

  • Upfront physical hardware: $8k
  • Datacenter: $1500/month: secured cage $3k/month
  • Tooling/Monitoring/Development Time: 21k/month (Human resources @ 250k salaries/yr)
  • Backups: Another Datacenter with same hardware $12k, ongoing cost $2k/month
  • First-year total costs are close to $350k, thereafter near $24k/month

To become profitable, validation operators must keep costs low by hiring quality engineers for a low upfront salary, choosing an ideal location (cheaper to operate a node in some countries), using virtual machines, and adding hardware efficiencies (if using and upgrading bare metal).

Another technique, many Staking as a Service companies use, is staking to multiple chains. This helps them move closer to economies of scale, offer more variety to investors, develop new products/techniques in-house to sell, and compete in new blockchains’ bounty competitions for prizes.

Net income from pure block rewards for a professional team operating on a top 100 chain, that is voted to a validating position by delegates and receives top percentile rewards for their work, can expect a range of 15k — 800k /year per chain. A large range, but other factors affect profit such as token price, cash-out frequency, and percentage of rewards a team can competitively keep.

Some teams report negative returns. This could be due to low or no commission rates for the Validator via chain code, or they choose to charge Delegators low commission rates. Some teams share 100% of their Block rewards with Delegators for their votes. So, if rewards are mostly given away, the Validator could operate at negative income. There are numerous reasons a team would do this, but they usually draw income from other sources.

The Importance of Proof of Stake and Quality Validators:

Beyond technical knowledge, excellent hardware, and an economic foundation for continuous improvement, there are other attributes that make top-tier Validators. Delegated proof-of-stake consensus requires great validators, which increases the chance of protocol success exponentially. Every validator knows technical aspects of the protocol that retail and sophisticated token investors do not. Some protocols ensure only proprietary specifications are shared with validators.

With knowledge asymmetry and capabilities for community malfeasance, Validators must constantly earn trust from token Delegates and fellow Validators. Technical proficiency must be paired with ethics and goodwill. Validators must avoid chain sabotage, but also missing block production. For deliberate misconduct or negligence, some protocols introduced “Slashing” or financially punishing Validators and sometimes the Delegates who voted for them.

Alpha Stake seeks Validators who are motivated to improve the base protocol layer. Protocol ecosystem enhancement such as direct coding, white-hat hacking, and submitting proposals for upgrades are advanced skills desired in Validators, but not necessarily expected. Other means of contribution include recruiting developers to build middle-ware or dApps on top of the protocol. Validators can host community events such as hackathons or conferences. Positive impact can happen by way of virtual education modules, writing articles, hosting podcasts, or producing videos for public consumption.

Validators’ responsibilities extend beyond security, processing transactions, and validating block production, they are the drivers of trust, promotions, and business robustness of the blockchain. Every project seeks to dominate a sector, gain commercial viability, or onboard mass adoption. A key factor to enable these ultimate good outcomes are technically sound, reliable, engaged, and trustworthy Validators.

The Future of DPoS Consensus Mechanism:

Eventually, every DLT chain that matters will develop enterprise-scaled Validators rotating through the top positions. The politics of maintaining and advancing the protocol will be abstracted away from retail token holders. The winners of leading chains will grow and require server warehouses the size equal to Google’s locations. The validation process in the future will be bankrolled by venture capitalists, banks, and family offices to accommodate the ever-expanding footprint of server-side edge data centers needed to meet future demand, making user votes obsolete.

For any new layer 1 protocol developments, the Validators with track records of excellent reputation will be called upon to secure their blockchain. No protocol creator(s) could afford to risk anything less.

Professional Validators are needed to establish trust not only for new financial systems, but also for diverse parties involved in supply chain logistics, education credentialing institutions, automotive & aviation OEMs who incorporate IOT technology, international portable healthcare data sharing including digital IDs, and most important, trusted to handle inter-government cooperation for cross border attestation and provenance of agreements, titles, judgments, treatises, and any other legal documentation.

Hopefully, thoughtful Validators will continue accessible channels of communication to keep enthusiasts, at all levels of token wealth, in the loop of the protocol’s inner workings.

Most Validators today are niche-minded workers. Many were trained in traditional IT departments to be a segment of that department to support a corporation that barely knows they are there. Now it is time for people skilled enough to become Validators to take a leading role in what comes next. Now it is time for Validators to be seen, vocal, and innovative.

Distributed Ledger Technology seeks to operate the decentralized internet, called Web 3.0 or Web3. The next generation of the internet seeks to work in tandem and eventually replace legacy cloud computing services such as AWS, MS Azure, VMware, and IONOS by 1&1. Cloud backup databases such as Oracle Cloud, Rackspace, and IBM Cloud are services DLT not only seeks to disrupt but overtake as an industry standard.

The final attribute Validators need is courageous resilience. Many obstacles block the path of entrepreneurs, but DLT and DPoS networks create special pushback from entrenched entities that resist what’s coming next. Many walls must be climbed, broken through, or knocked down while continuously creating new blocks. Those who are willing to pledge unwavering dedication to delegated proof-of-stake consensus advancement will be the victors.