Proof of Burn — does it work?
Proof of burn (POB) is a consensus algorithm that tries to address the high energy consumption issue of a Proof of Work — Bitcoin’s consensus. Does this proof of burn work?
“Burnt coins are mining rigs!”
There’s many consensus mechanisms that I will be covering in a series of articles. You can check some of them in the links below:
- What’s Proof of Elapsed Time
- Bitcoin Proof of Work — The Only Article You Will Ever Have to Read
- Proof of Stake — What is and how does it work?
- Proof of Importance Consensus Mechanism
- Delegated Proof of Stake
So… do we just burn the coins?
Invented by Iain Stewart, Proof of burn is an experimental consensus mechanism and a fascinating concept: Slimcoin, a defunct cryptocurrency used to use it. Proof of burn aims to provide a very different incentive mechanism for nodes to participate in validating transactions.
Proof of burn can be seen as precisely the opposite of what the Central Banks do: it destroys currency instead of printing it.
Instead of “burning” electricity and hardware like proof of work does, proof of burn just burns its own coins to provide an incentive for nodes to be good actors in the blockchain.
Proof of burn miners needs to send a number of coins to an unspendable address. When coins are sent to this unspendable address, they are not really destroyed or burned. They simply fall into a black hole and can no longer be spent or accessed. Many other cryptocurrencies or tokens use the same concept in order to decrease the supply.
Back to proof of burn, the more coins they send to burn, the higher the probability of being chosen by the algorithm to mine a block. They receive a reward if they validate transactions and mine a block correctly. If not, they just simply burned the coins and wasted money.
- Miners are randomly chosen according to the number of coins they sent to burning
- Burning more coins translates to more commitment, thus higher the chances of being selected as a miner (just like spending more electricity on proof of work increase the chances of mine a block)
- Burned coins are lost forever, locked in a burn address
An unspendable address or burn address is a blockchain address with no private keys, and consequently, the coins sent to this address are forever lost. The coins don’t disappear from the blockchain; they are simply sent to a black hole and can’t be used anymore.
Proof of burn is a deflationary concept where the supply of coins decreases over time, increasing the scarcity and more likely to increase the value of the coin holders. BNB (Binance coin) also burns BNB coins periodically, decreasing the supply in the market. On the other hand, coins that increase the supply over time tend to decrease value, i.e. they are inflationary. Examples of inflationary currencies are the fiat currencies such as the USD and Dogecoin. Over time, these currencies decrease the value through printing; thus the number of coins necessary to buy certain good increases over time.
On a side note, 22% of the USD in circulation were printed in 2020. More than $ 9 Trillion flooded the market, making the USD cheaper. The USD lost a lot of its value in 2020, meaning that we can now buy less good with the same amount of USD. On the other hand, you can buy more goods with the same amount of Bitcoin because these currencies have a fixed and predictable supply.
- It doesn’t need as much electricity as other implementations like proof of stake
- No need for specialized hardware
- Coin burning reduces supply thus increasing the price (in theory)
- Motivates a long term commitment
- Supposedly incentivizes a more decentralized consensus mechanism
- Not tested on large scale. Its scalability’s not proven yet
- The process of burning coins is not always transparent
Do you think Proof of Burn should be tested on large scale? Could this consensus mechanism work?
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Proof of Burn — was originally published in DataDrivenInvestor on Medium, where people are continuing the conversation by highlighting and responding to this story.