While most blockchain systems use Proof of Work (PoW) or Proof of Stake (PoS) consensus algorithms, Proof of Burn (PoB) is being tested as a possible alternative.
Simply put, blockchain consensus algorithms are responsible for the security of the network, verifying and validating transactions.
A Proof of Work blockchain such as Bitcoin creates a scenario in which miners compete to find the correct solution to a complex cryptographic problem. The first miner, in order to find a solution for a specific block, broadcasts its proof of work (block hash) to the rest of the network. A distributed network of nodes then verifies whether the evidence is valid or not. If this is true, the miner receives the permanent right to add this block to the blockchain, and also receives a reward for the new Bitcoins created.
When it comes to 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 performed by so-called block forgers or minters, which are selected in a deterministic way. The more coins a forger has in his stake, the higher the likelihood of him being chosen as a block validator. However, unlike PoW systems, most PoS systems do not provide a block reward, and all minters receive from validating a block is a transaction fee.
Although the Proof of Burn algorithm is similar to PoW and PoS, it has its own special way of achieving consensus and validating blocks.
Proof of Burn (PoB)
There are several versions of PoB, but the concept of Proof-of-Burn, idealized by Iain Stewart, is the most recognized in the cryptocurrency space. This has been proposed as a more robust alternative to the PoW consensus algorithm.
Essentially, Proof of Burn looks like the Proof of Work algorithm, but at a lower rate of energy consumption. The process of checking a block in PoB-based networks does not require the use of powerful computing resources, and does not depend on powerful mining equipment (ASIC type). Instead, cryptocurrency is intentionally burned as a way of “investing” in blockchain resources, so mining candidates are not required to invest physical resources. In PoB systems, miners invest in virtual mining hardware (or virtual mining).
In other words, by burning coins, users can demonstrate their commitment to the network, gaining the right to “mine” and validate transactions. Because the process of burning coins represents virtual mining power, the more coins a user burns for the system, the more mining power they have, and therefore the more likely they are to be selected as a block validator.
How does Proof of Burn work?
In a few words, the process of burning coins is to send them to a public verified address where they become inaccessible and useless. Typically, these addresses (aka. eater addresses) are randomly generated, without any public key associated with them. Naturally, the process of burning coins reduces market availability and creates a shortage of coins, potentially increasing their value. But more than that, burning coins is another way to invest in network security.
One of the reasons why Proof of Work blockchain is secure is the fact that miners need to invest a lot of resources in order to eventually mine to be profitable. This means that the PoW miner will have every incentive to act honestly and help the network to prevent the initial investment from being wasted.
The idea is similar for Proof of Burn algorithms. But instead of investing in electricity, labor and computing power, a PoB blockchain must be backed by investments made by burning coins and nothing else.
Similar to a PoW blockchain, PoB systems will provide rewards to miners and, over a period of time, the rewards are expected to cover the initial investment of coins burned.
As stated earlier, there are different ways to implement the Proof of Burn algorithm. While some projects perform PoB mining by burning Bitcoins, others achieve consensus by burning their own coins.
Proof of Burn vs Proof of Stake
One thing that PoB and PoS have in common is that block validators must stake their coins to participate in the consensus mechanism. However, the PoS blockchain requires forgers to stake their coins, usually locking them up. But if they decide to leave the network, they can take those coins and sell them. Therefore, in such a scenario, there is no permanent market shortage because coins are only taken out of general circulation for a certain period of time. On the other hand, PoB block validators must destroy their coins forever, creating a permanent economic scarcity.
Advantages and Disadvantages of Proof of Burn
The advantages/disadvantages listed here are based on general arguments made by PoB proponents and should not be considered proven facts. There are disputes about these arguments that require further testing to be able to confirm both valid and invalid claims.
Advantages
More stable. Reduced energy consumption.
Does not require hardware mining. Burnt coins are virtual manning equipment.
Burning coins reduces their overall circulation (market scarcity).
Long-term commitment from miners is encouraged.
Coin distribution/mining is usually less centralized.
Flaws
Some say that PoB is not very environmentally friendly since the Bitcoins burned are generated through PoW mining, which requires a lot of resources.
It has not been proven to work on a large scale. More testing is needed to confirm its effectiveness and safety.
Verification of the work done by miners is usually delayed. It is not as fast as the Proof of Work blockchain.
The average life of a coin is not always transparent or easy to verify for the average user.
