Although most blockchain systems use a consensus algorithm called Proof of Work (PoW) or Proof of Stake (PoS), Proof of Burn (PoB) - or Proof of Burn - is being tested as a possible alternative to PoW and PoS.
Generally speaking, consensus algorithms are responsible for keeping the network secure and verifying and validating transactions.
A Proof Of Work-based blockchain like Bitcoin creates a scenario where miners compete with each other to find a valid solution to a complex cryptographic problem. The first miner to find a solution for a given block broadcasts its proof of work (block hash) to the rest of the network. The distributed network of nodes will then check whether or not this solution is valid, if valid, the miner gains the right to permanently add that new block to the blockchain network and is also rewarded with newly generated Bitcoins.
When it comes to Proof of Stake, the consensus algorithm works in a different way. Instead of using hash functions, the PoS algorithm makes use of digital signatures that prove ownership of the coins. The validation of new blocks is done by so-called forgers or minters, which are chosen deterministically. The more coins a forger has at stake, the greater the chances of being chosen as a block validator. Unlike the PoW algorithm, most PoS-based systems do not offer block rewards, and all miners get for validating a block are transaction fees.
Although the Proof of Burn algorithm has similarities with PoW and PoS, it has its own particular way of reaching consensus and validating blocks.
Proof of Burn – PoB
There is more than one version of PoB, but the Proof of Burn concept devised by Lain Stewart is probably the most recognized within the cryptocurrency space. It has been proposed as a more sustainable alternative to the PoW consensus algorithm.
Essentially, Proof of Burn looks like a Proof of Work algorithm, but with reduced energy consumption rates. The PoB-based network block validation process does not require the use of powerful computational resources and does not depend on powerful mining hardware (such as ASICs). Instead, cryptocurrencies are intentionally burned as a way to “invest” resources into the blockchain, so that would-be miners do not need to invest with physical resources. In PoB-based systems, miners invest in virtual mining rigs (or virtual mining power).
In other words, by burning coins, users are able to demonstrate their commitment to the network, obtaining the right to “mine” and validate transactions. As the process of burning coins represents virtual mining power, the more coins a user burns in favor of the system, the more mining power he/she has, and therefore, the greater the chances of being chosen as the next block validator. .
How does Proof of Burn work?
In a nutshell, the process of burning coins involves sending them to a verifiable public address where they become inaccessible and useless. Typically these addresses (also known as “eater addresses”) are randomly generated without having any particular key associated with them. Naturally, the process of burning coins reduces market availability and creates an economic scarcity, causing a potential increase in their value. But more than that, burning coins is another way to invest in network security.
One of the reasons why Proof of Work-based blockchains are more secure is the fact that miners need to invest a lot of resources for it to be profitable. This means that a PoW miner will have every incentive to act honestly and help the network in order to avoid their initial investments being wasted.
The idea is similar when we talk about algorithms based on Proof of Burn. However, instead of investing in electricity, labor and computing power, PoB-based blockchains must be guaranteed by investments made through burning coins and nothing else.
Similar to PoW-based blockchains, PoB systems will provide one block rewards to miners within a certain period of time, the rewards must cover the initial investment of the burned coins.
As previously stated, there are different ways to implement the consensus algorithm based on Proof of Burn. While some projects perform their PoB mining by burning Bitcoins, others achieve consensus by burning their own currency.
Proof of Burn vs Proof of Stake
One thing that PoB and PoS have in common is the fact that block validators have to invest their coins to participate in the consensus mechanism. However, PoS-based blockchains require forgers to stake their coins, making them trapped. But if they decide to leave the network, they can withdraw their coins and sell them on the market. As a result, there is no permanent shortage of coins on the market, because coins are only removed from circulation for a certain period of time. On the other hand, PoB-based block validators have to destroy their coins forever, creating permanent economic scarcity.
Advantages and Disadvantages of Proof of Burn
The advantages and disadvantages listed here are based on general arguments made by supporters of the PoB consensus algorithm and should not be considered proven facts. There are controversies regarding these arguments that require further testing to be confirmed as valid or invalid.
Benefits
More sustainable. Reduced energy consumption.
No need for mining hardware. Burnt coins are virtual mining rigs.
Burning coins reduces circulation supply (market shortage).
Encourages long-term commitment from miners.
The distribution and mining of coins tends to be less centralized.
Disadvantages
Some say that PoB is not actually environmentally friendly, since the bitcoins being burned are generated through resource-intensive PoW-based mining.
It has not been proven whether it works on a large scale. More tests are needed to confirm its efficiency and safety.
The coin burning process is not always transparent or easily verifiable by the average user.