Most cryptocurrency networks use the proof-of-work (PoW) and proof-of-stake (PoS) consensus algorithms. There are also some more “exotic” ones, like the proof-of-space algorithm used by Chia, which requires proof of hard drive space. There are also those that demand proof of… destruction! In this article, we’ll introduce the concept of proof-of-burn and show you how this algorithm that requires token burns actually works.
How PoB works
The core idea of PoB involves burning a certain number of coins in order to earn the right to attach a new block to the blockchain and, in doing so, receive a reward.
Anyone can burn a given number of coins as an investment in virtual mining. The destruction of coins demonstrates the user’s willingness to suffer short-term losses for the sake of long-term cooperation with the blockchain and rewards in the form of the right to mine cryptocurrency. Moreover, the more coins burned, the greater the chance of mining the next block
In this regard, PoB resembles PoW: the burning process can be compared to the purchase of mining equipment. On blockchains that use proof-of-burn consensus, every time you burn coins you are essentially buying virtual mining hardware, and the more coins you burn the more powerful this “hardware” becomes.
The process of burning is simple: coins are sent to a special “eater address”, from which they cannot be withdrawn or spent. The address is randomly generated and does not have a private key. The transaction is recorded in the distributed ledger and serves as proof of the burning of the crypto.
Depending on how the PoB mechanism is set up, miners can destroy either the native coin of the network they are working for, or the cryptocurrencies of other blockchains such as Bitcoin.
Over time, the share of the miner's burned coins will decrease, and they will need to burn more in order to increase the chances of mining a block. PoB is similar to PoW in this sense too, given that the latter requires miners to continually invest in purchasing more powerful equipment.
There is also a similarity with PoS: in order to receive a reward, you need to spend a certain amount of cryptocurrency. Unlike staking, however, you won’t be able to take it back: the assets are taken out of circulation permanently when they are sent to the eater address.
Advantages and disadvantages of PoB
Here are some of the advantages of proof-of-burn:
There is no need to purchase expensive equipment. You don’t need expensive graphics cards or ASICs to mine cryptocurrency on blockchains with the PoB consensus protocol – all that’s required is a laptop and a crypto wallet.
- Energy efficiency. Lower amounts of electricity are required to maintain a PoB network compared with networks that use PoW consensus.
- Deflation. Burning coins pushes up the price of the remaining ones.
- Decentralization. Thanks to the way mining works on PoB consensus networks, there is no need to join large-scale mining pools in order to increase equipment power. This contributes to greater decentralization on the blockchain.
- Long-term cooperation and the fulfilment of obligations are incentivized. Burning encourages users to work for the benefit of the network at least until the investment pays off.
Key disadvantages of PoB:
- The efficiency of PoB has not been proven at scale, since this algorithm hasn’t been widely adopted yet.
- Unlike PoS networks, where you can get your staked money back, this is impossible to do on a PoB blockchain. Burnt coins are lost forever.
- The validation process when creating blocks takes too long compared with other algorithms, due to the lack of a direct connection between the solved problem and the reward. In PoB, all participants “solve” the problem in one way or another by burning tokens.
The proof-of-burn algorithm is an interesting alternative to the PoW and PoS consensus protocols, and tries to combine the best aspects of both. It remains a technology in its infancy and has not been deployed by many projects as of yet. Some examples include Slimcoin (SLM) and Counterparty (XCP). If the problem of transaction processing speeds can be solved and successful tests can be carried out under heavy loads, then PoB could present a real alternative to proof-of-work, proof-of-stake and other consensus protocols based on them.