Diversified Proof of Stake is a variation of the popular PoS consensus mechanism that allows multiple assets to be staked on a single blockchain.
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What Is Diversified Proof of Stake?
Diversified Proof of Stake is a variation of the popular PoS consensus mechanism that allows multiple assets to be staked on a single blockchain. This approach enables assets from one chain to be staked on another, allowing interchain staking.
How Does Diversified Proof of Stake Work?
The selection of validators in a classic Proof-of-Stake network is tied to the amount of coins a user is prepared to “stake” as security. The more tokens a validator has staked, the higher the chance of being chosen to validate a block.
Diversified Proof of Stake takes this concept a step further by allowing multiple assets to be staked on a single blockchain. This means that assets from one chain can be staked on another, creating a cross-chain relationship that benefits all participating chains.
Advantages of Diversified PoS
Greater Scalability and Throughput: Diversified PoS enables blockchains to handle more transactions and achieve higher throughput compared to traditional PoS systems. This is because it allows for multiple assets to be staked on a single blockchain, increasing the overall capacity of the network.
Increased Decentralization: By allowing multiple assets to be staked on a single blockchain, Diversified Proof of Stake promotes decentralization and reduces the risk of a single entity controlling the network. This is particularly important in the world of cryptocurrencies, where decentralization is a key feature that ensures the security and integrity of the network.
Enhanced Security: It provides an additional layer of security by allowing assets from different chains to be staked on a single blockchain. This cross-chain relationship helps to strengthen the overall security of the network and protect against potential attacks.
Wider Range of Diverse Assets and Yield Opportunities: With Diversified Proof of Stake, users can stake assets from different chains, providing them with a wider range of diverse assets and yield opportunities. This can be particularly attractive for investors looking to diversify their portfolios and maximize their returns.
Real-World Applications of Diversified Proof of Stake
Diversified PoS is still a relatively new concept in the world of blockchain technology. As more projects adopt this mechanism, we can expect to see a growing number of use cases and applications that take advantage of its unique features.
For example, Diversified Proof of Stake could be used to create decentralized finance (DeFi) platforms that allow users to stake multiple assets and earn rewards from various sources. This would provide users with a more diversified and potentially higher-yielding investment opportunity compared to traditional PoS systems.
Additionally, it could be used to create cross-chain bridges that enable seamless asset transfers between different blockchains. This would help to improve the overall interoperability of the blockchain ecosystem and facilitate the development of new, innovative applications that leverage the strengths of multiple chains.
Rewards for Diversified Proof of Stake Assets
Each asset in a Diversified PoS system has a Reward Weight that determines how much of the system’s total rewards that asset will get. This value caps the share of the chain’s rewards that each asset can earn. The Reward Weight of native tokens is 1.
For example, a chain has two staking assets, one of which is “native” and a Diversified Proof of Stake asset called “LSD1.” If LSD1’s Reward Weight is 0.5, then the staked LSD1 asset will distribute 33.3% of the total chain rewards to its staking participants. Users who stake the chain’s native asset will receive the remaining 66.7% of rewards.
The Diversified Proof of Stake expands the already existing native rewards by introducing a new reward mechanism known as the Take Rate. Each asset in a Diversified Proof of Stake system is subject to an annualized tax known as the Take Rate (which may be adjusted to 0 by governance). After applying the Take Rate to a staked Diversified Proof of Stake asset, the profits are split evenly among the staking participants.
To get additional revenue, cryptocurrency holders may choose to stake their coins in a Proof of Stake (PoS) network or delegate their coins to a staking pool, both of which provide enticing staking rewards. Block rewards are distributed proportionally to each user’s stake; for example, if your stake is equivalent to 5% of the total staking balance, you will receive 5% of the block reward.
It is worth noting that staking rewards are not a constant and can change based on the asset staked and the rules of the network. Depending on the network, the rewards for staking an asset might be larger or lower depending on criteria like the total number of assets staked or the length of time an asset has been staked. The rewards and risks of staking various assets in a Diversified Proof of Stake system must thus be carefully considered by investors.