Although most blockchain systems commonly use Proof of Work (PoW) and Proof of Stake (PoS) consensus algorithms, Proof of Burn (PoB) has gradually emerged as a possible alternative to the above algorithms.

In general, blockchain consensus algorithms are responsible for securing the network and validating transactions.

Proof-of-Work blockchains, such as Bitcoin, are based on the scenario where miners compete with each other to find valid solutions to complex cryptographic problems. The first miner to find the solution to a block broadcasts his proof of work (block hash) to the network, and a distributed network of nodes will verify whether the proof is valid. If valid, the miner has the right to permanently add the block to the blockchain and be rewarded with newly generated Bitcoins.

When we talk about proof-of-stake blockchains, the consensus algorithm works differently. Instead of using hash functions, proof-of-stake algorithms use digital signatures to prove the ownership of coins. The validation of new blocks is done by so-called block "forgers" or "coiners", who are selected in a deterministic way. The more coins a forger has, the more likely he or she is to be selected as a block validator. Unlike proof-of-work systems, most proof-of-stake systems do not offer block rewards. The rewards for forgers from validating blocks are all transaction fees.

Although the Proof of Burn algorithm has some similarities with Proof of Work and Proof of Stake, it has its own specific way of reaching consensus and validating blocks.


Proof of Burn (PoB)

There are many versions of the Proof of Burn algorithm, but the one proposed by Iain Stewart is probably the most widely accepted in the cryptocurrency space. It is considered a sustainable alternative to the Proof of Work algorithm.

Essentially, proof of burn looks like a proof of work algorithm with lower energy consumption. This is because proof of burn block verification does not require a lot of computing resources or rely on powerful mining hardware (such as ASICs). Instead, as a way to "invest" in the blockchain, digital currency is deliberately destroyed (burned) so that candidate miners do not need to invest physical resources. In the proof of burn system, miners invest in virtual mining platforms (or virtual mining electricity).


In other words, by destroying digital currency, users can prove their investment in the network and obtain the right to "mine" and verify transactions. Since the process of destroying coins represents virtual mining power, the more coins a user destroys in the system, the greater the (virtual) computing power he/she has, and therefore the higher the chance of being selected as the next block validator.


How does Proof of Burn work?

In simple terms, the burning process involves sending coins to a publicly verifiable address where they can no longer be spent. Typically, these addresses are randomly generated private keyless addresses. Of course, the process of burning coins reduces market liquidity and creates scarcity, leading to a potential increase in their value. But more importantly, coin burning is another way to ensure network security.

One of the reasons proof-of-work blockchains are secure is that miners need to invest a lot of resources to eventually make a profit. This means that miners are incentivized to help the network in an honest manner to prevent their initial investment from being wasted.

The idea is similar to proof of burn, but the proof of burn blockchain does not invest in electricity, labor, and computing power, it only ensures security by burning coins.

The Proof of Burn system will provide block rewards to miners, and over a certain period of time, it is expected that this reward will contain the initial investment of the burned currency.

As mentioned above, there are different ways to implement proof of burn. Some projects do this by burning Bitcoin, while others do this by burning their own native digital currency.


Proof of Burn vs. Proof of Stake

One thing that Proof of Burn has in common with Proof of Stake is that block validators must stake their coins to participate in the consensus mechanism. However, Proof of Stake requires forgers to stake their coins and usually lock them up. But if they decide to leave the network, they can take the coins and sell them on the market. Therefore, there is no permanent market scarcity in this case because the currency is only out of circulation for a period of time. Block validators in Proof of Burn must destroy their coins forever, creating permanent economic scarcity.


Pros and Cons of Proof of Burn

The pros/cons listed below are based on general arguments made by Proof of Burn supporters and should not be considered proven facts. There is still controversy regarding these arguments and further testing is needed to confirm their validity.


advantage

  • High sustainability and reduced energy consumption.

  • No mining hardware is required, and currency burning uses virtual mining machines.

  • Cryptocurrency burning reduces circulating supply (market scarcity).

  • Encourage miners to invest in the long term.

  • Cryptocurrency distribution/mining is more decentralized.


shortcoming

  • Proof of Burn is not really environmentally friendly because the burned Bitcoins are produced through Proof of Work mining, which requires a lot of resources.

  • It has not been proven to work on a larger scale blockchain network. More testing is needed to confirm its efficiency and security.

  • The verification work by miners is often delayed. It is not as fast as the proof-of-work blockchain.

  • The process of burning digital coins is not always transparent or easily verifiable by ordinary users.