Proof of Burn Explained

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

In general, the blockchain consensus algorithm is responsible for securing the network as well as validating transactions.

Proof-of-work blockchains, such as Bitcoin, use a scenario where miners compete with each other to find efficient solutions to complex cryptographic problems. The first miner to find the answer to a block broadcasts his proof of work (block hash) to the network, and the distributed network of nodes will verify that the proof is valid. If valid, miners have 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, consensus algorithms work in a different way. Proof-of-stake algorithms do not use hash functions, but instead use digital signatures to prove ownership of coins. Validation of new blocks is done by so-called block “forgers” or “minters”, who are chosen in a deterministic way. The more coins a forger has, the more likely it is to be selected as a block validator. Unlike proof-of-work systems, most proof-of-stake systems don’t offer block rewards, and the rewards forgers get from validating blocks are transaction fees.

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

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Proof of Burn (PoB)

There are many versions of the proof-of-burn algorithm, and the version proposed by Iain Stewart is probably the most popular in the digital currency field. It is considered a sustainable alternative to proof-of-work algorithms.

Essentially, proof-of-burn looks like a lower-energy proof-of-work algorithm. Because proof-of-burn block verification does not require a large amount 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 material resources. In a proof-of-burn system, miners invest in virtual mining rigs (or virtual mining electricity).

In other words, by destroying the digital currency, it is possible to prove the user’s investment in the network, obtain the right to “mine” and verify the transaction. Since the process of destroying coins represents virtual mining power, the more coins a user burns in the system, the more (virtual) computing power he/she has, and therefore the higher the chance of being selected as a validator for the next block.

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How does Proof of Burn work?

Simply put, the process of burning involves sending coins to a publicly verifiable address, where they can no longer be used. 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, currency burning is another way to secure the network.

One of the reasons proof-of-work blockchains are secure is that miners need to invest a lot of resources in order to be ultimately profitable. This means that miners are incentivized to help the network honestly to prevent the initial investment from being wasted.

The idea is similar to Proof-of-Burn, but the Proof-of-Burn blockchain does not invest electricity, labor and computing power, it only guarantees security by burning currency.

The proof-of-burn system will provide miners with block rewards, and for a certain period of time, this reward is expected to include the initial investment in burning the currency.

As mentioned earlier, there are different ways to achieve proof of combustion. Some projects achieve proof-of-burn by burning bitcoin, while others achieve proof-of-burn by burning their own native digital currency.

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Proof of Burn vs Proof of Stake

One thing that Proof of Burn and Proof of Stake have in common is that block validators must stake their digital currency in order to participate in the consensus mechanism. Proof-of-stake, however, requires forgers to stake their coins and typically lock them up. But if they decide to leave the network, they can take the digital currency and sell it on the market. Therefore, there is no permanent market scarcity in this case, as the currency is only in circulation for a certain period of time. Proof-of-burn block validators must permanently destroy their digital currency, creating permanent economic scarcity.

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Pros and Cons of Proof-of-Burn

The advantages/disadvantages listed below are based on the general arguments of Proof of Burn proponents and should not be considered proven facts. There is still debate on these arguments, and further testing is needed to confirm their validity.

Advantages

High sustainability and reduced energy consumption.

No mining hardware is required, and virtual mining machines are used for currency burning.

Digital currency burning reduces circulating supply (market scarcity).

Miners are encouraged to invest in the long term.

Digital currency distribution/mining is more decentralized.

Disadvantage

Proof-of-burn is not really environmentally friendly, as the burned bitcoins are generated through proof-of-work mining, which requires a lot of resources.

Not proven to work on larger-scale blockchain networks. More testing is needed to confirm its efficiency and safety.

Validation work by miners tends to be delayed. It is not as fast as a proof-of-work blockchain.

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

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