Leased Proof of Stake (LPoS)

Leased Proof of Stake (LPoS) is a variant of the proof of stake consensus mechanism in which holders of a blockchain's native token can "lease" their balance to a node that produces blocks. The leased amount adds to the node's stake and its chance of being chosen to create the next block, but the coins never leave the holder's wallet, and the lease can be cancelled. In return, node operators usually share part of their block rewards and fees with the people leasing to them. The design is most closely associated with the Waves blockchain, launched in 2016.

LPoS should not be confused with Liquid Proof of Stake, the Tezos system that shares the same abbreviation. Both let ordinary holders back a block producer without handing over their coins, but they come from different networks, use different rules and terminology, and Tezos combines its design with on-chain governance. LPoS also resembles Delegated Proof of Stake, although it does not rely on a small elected set of block producers.

Imagine a village raffle where each person's chance of winning depends on how many tickets they hold, and the winner earns a small prize for running the next stall. Someone with only a few tickets has almost no chance. Under LPoS, that person can lend the counting power of their tickets to a trusted stallholder. The tickets stay in their own pocket, but they count towards the stallholder's total.

When the stallholder wins, they share part of the prize with everyone who lent them tickets. If the lender changes their mind, they can take back the counting power and lend it to someone else. Nobody ever hands over the tickets themselves, so the stallholder cannot spend them.

1. A node operator runs a full node and announces that it accepts leases, usually publishing its reward-sharing terms.
2. A holder signs a special lease transaction from their wallet naming the node's address and the amount to lease. The balance stays in the holder's account but is locked against spending while the lease is active.
3. The network adds leased balances to the node's own coins to calculate its "generating balance", which sets how often it is selected to produce blocks.
4. When the node produces blocks, it earns rewards and fees. The operator pays an agreed share to leasers, often through regular payouts made outside the protocol.
5. The holder can cancel the lease at any time with a cancellation transaction. On Waves, a lease counts towards block generation only after a waiting period of blocks, which stops balances being moved around quickly to game selection.

Because the protocol never transfers custody, a leaser's coins are not at risk if the node misbehaves in the way that a deposit with a custodial service would be. Waves has not used slashing, so leasers do not lose their principal if a node goes offline; they simply stop earning.

• Participation for small holders. People with balances too small to run a node profitably can still contribute to security and earn rewards, much as they would through delegated staking.
• No lock-up of custody. Coins remain under the holder's private key, avoiding the counterparty risk of handing them to a pool or exchange.
• Flexibility. Leases can be cancelled and moved, which lets holders punish poorly run or greedy nodes by leaving.
• Lower energy use. Like other proof-of-stake systems, LPoS avoids the energy costs of proof of work.

LPoS shares the general weaknesses of stake-based systems. Leasers tend to flock to the largest nodes or those offering the highest payouts, which can concentrate block production among a few operators and weaken decentralisation. Payouts depend on the operator's honesty, since reward sharing is often a promise rather than a rule enforced by the protocol. Without slashing, the cost of misbehaving falls mostly on the node's reputation rather than on locked funds, which some researchers see as a weaker security guarantee than designs with penalties.

The value of rewards also depends on the market price of the token. On a network with modest trading volume, staking yields can be wiped out by price falls, and the security of the chain depends on the market value of the coins backing it.

• Waves documentation