While most blockchain systems use a Proof of Work (PoW) or Proof of Stake (PoS) consensus algorithm, Proof of Burn (PoB) is currently being tested as a possible alternative.
In general, blockchain consensus algorithms are responsible for the security of the network as well as the verification and validation of transactions.
A Proof of Work blockchain, like Bitcoin's, creates a scenario where miners compete to find a valid solution to a complex cryptographic problem. The first miner to find a solution for a certain block broadcasts its proof of work (the block hash) to the rest of the network. The distributed node network will then verify whether this proof is valid or not. If it is valid, the miner earns the right to permanently add the block to the blockchain and is also rewarded with newly created bitcoins.
In the case of Proof of Stake blockchains, the consensus algorithm works differently. Instead of using hash functions, the PoS algorithm uses digital signatures that prove ownership of the Coins. Validation of new blocks is done by what are called validators, who are chosen deterministically. The more Coins a validator has locked in 'stake', the higher the chances of being chosen as a block validator. However, unlike PoW systems, most PoS systems do not provide block rewards, and all a validator receives from the validation of a block are transaction fees.
Although the Proof of Burn algorithm has similarities with PoW and PoS, it has its own way of achieving consensus and validating blocks.
Proof of Burn (PoB)
There is more than one version of PoB, but the concept of proof of destruction idealized by Iain Stewart is probably the most recognized in the cryptocurrency space. It has been proposed as a more sustainable alternative to the PoW consensus algorithm.
Proof of Burn essentially resembles a Proof of Work algorithm but with reduced energy consumption rates. The block validation process of PoB networks does not require powerful computing resources and does not depend on powerful mining hardware (like ASICs). Instead, Coins are deliberately destroyed, and this constitutes a way to 'invest' resources in the blockchain, so candidate miners are not required to invest physical resources. In PoB systems, miners invest in virtual mining platforms (or virtual mining power).
In other words, by performing Coin destructions, users are able to demonstrate their commitment to the network, gaining the right to mine and validate transactions. Given that the Coin destruction process represents virtual mining power, the more Coins spent by a user in favor of the system, the greater the mining power they have, and consequently, the more likely they are to be chosen as the next block validator.
How does proof of destruction work?
In a few words, the process of Coin destruction consists of sending them to a publicly verifiable address where they become inaccessible and useless. Generally, these addresses (in other words, burn addresses) are generated randomly without any private key associated with them. Naturally, the Coin destruction process reduces the circulating supply in the market and creates an economic scarcity (increased rarity), potentially leading to an increase in its value. But beyond that, Coin Burn is an alternative way to invest in the security of the network.
One of the reasons why Proof of Work blockchains are secure is that miners must invest a lot of resources to ultimately be profitable. This means that a PoW miner will have all the incentives to act honestly and help the network in order to avoid waste of initial investments.
The idea is similar for Proof of Burn algorithms. But instead of investing in electricity, work, and computing power, PoB blockchains are supposed to be secured by the investment made through Coin destruction and nothing else.
Just like PoW blockchains, PoB systems will provide block rewards to miners, and over a certain period, the rewards should cover the initial investment of destroyed Coins.
As mentioned earlier, there are different ways to implement the Proof of Burn consensus algorithm. While some PoB projects mine by destroying Bitcoins, others reach consensus by burning their own cryptocurrency.
Proof of destruction vs proof of stake
The common point between PoB and PoS is that block validators must invest their own Coins in order to participate in the consensus mechanism. However, PoS blockchains generally require validators to lock Coins in 'stake'. However, if they decide to leave the network, they can recover these Coins and sell them on the market. Therefore, in such a scenario, there is no permanent shortage in the market because the Coins are only removed from circulation for a certain period. On the other hand, PoB block validators must destroy their Coins forever, thus creating a permanent economic scarcity.
Advantages and disadvantages of proof of destruction
The advantages/disadvantages listed here are based on the general arguments of PoB proponents and should not be considered proven facts. There is controversy regarding these arguments which require further testing to be confirmed valid or invalid.
Advantages
More sustainable. Reduced energy consumption.
No need for mining hardware. Coin destructions are virtual mining power.
Coin destructions reduce the circulating supply (scarcity in the market).
Encourages long-term commitment from miners.
The distribution/mining of Coins tends to be less centralized.
Disadvantages
Some say that Proof of Burn (PoB) is not really eco-friendly because the destroyed Bitcoins are generated by Proof of Work (PoW) mining, which requires a lot of resources.
Nothing has yet been proven on a large scale. Further testing is needed to confirm its effectiveness and security.
The verification of the work done by miners tends to be delayed. The process is not as fast as in Proof of Work blockchains.
The process of destroying Coins is not always transparent or easily verifiable by the average user.
