Proof of Burn Explained – An Alternative Crypto Consensus Algorithm
There’s no denying that blockchain technology is an invention that could be destined to change the world in ways we haven’t even begun to imagine.
One critical part of any blockchain, required if it is to function properly, is some sort of consensus algorithm that both secures the blockchain and ensures it works efficiently.
A consensus algorithm serves several purposes, two of which are safeguarding from manipulation and ensuring validity of transactions. Currently the most utilized consensus mechanisms are known as Proof-of-Work (PoW), which is the Bitcoin consensus protocol, and Proof-of-Stake (PoS), which is used by Peercoin and Dash
There are alternative consensus mechanisms being explored and one of these is called Proof-of-Burn (PoB). In the proof-of-burn mechanism users are required to “burn” or make permanently unavailable some mined PoW cryptocurrency.
When the PoW coins are burned the user receives coins or tokens of an alternative cryptocurrency, or in some cases other mining privileges on the network
Proof of Burn at Work
So, proof-of-burn works in a fairly simple fashion. The miners of the PoB coins will send coins to an unspendable address (also called an “eater address”), thus taking them forever out of circulation or burning them. These transactions are recorded on the blockchain, ensuring that there’s a necessary proof the coins cannot be spent again, and the user who burned the coins is issued a reward
The idea of proof-of-burn consensus is that the user burning the cryptocurrency is showing a long-term commitment to the coin by burning as they are taking a short-term loss in exchange for a long-term gain. Burning coins is also viewed as less resource intensive by some, in fact the resource being used is the person’s willingness to delay their profits.
Over time the user of a Proof-of-Burn coin continues receiving rewards, either increasing their stake of alternative coins, or earning greater privileges for mining on the network. In this way, the more coins burned by a user, the greater chance they have of successfully mining the next block, increasing their rewards further
There are a few ways to implement a Proof-of-Burn consensus mechanism. In some cases an existing Proof-of-Work coin, most typically Bitcoin, can be burned in exchange for the PoB coin. In other cases it is the actual PoB coin that is burned in order to gain increased mining privileges.
In much the same way that the cost of mining Bitcoin increases over time in the form of hardware and electricity costs, the cost of mining a PoB coin also increases over time as more coins need to be burned to maintain the same odds of being selected to mine the next block
The Eater Addresses
The eater address is simply an address that is used to store coins that can’t ever be used again, or burnt coins. While most public addresses are generated from a private key, and the private key holder then has access to any coins sent to that address, an eater address is a randomly generated address that is not associated with a private key.
Because there’s no private key association, and there’s no way to generate a private key from a public address, there is no way to ever access or spend any coins sent to the eater address. If you want to see it in action, here’s an eater address that has more than $100,000 worth of Bitcoin at the time of this writing. These Bitcoin are inaccessible now, and basically gone forever, although they do remain in the calculated supply
Proof of Burn Advantages
One argument made for proof-of-burn is that it encourages a long-term commitment and time horizon for a project. This theoretically creates greater price stability for the coin as long-term investors are less likely to sell or spend their coins.
Proof-of-Burn is also said to be better than proof-of-work at ensuring coins are distributed in a fair, decentralized manner. Contrast this with proof of work mining, where we’ve all seen how the rise of ASIC mining pools can cause greater centralization of mining.
Proof of Burn Disadvantages
While proof-of-burn proponents say it doesn’t use resources, critics claim that proof-of-burn does involve resource waste in as much as the resources used to generate the burnt coins is wasted.
There is also a problem similar to that seen in proof-of-stake consensus, where those who have a lot of coins continue to amass an even greater number of coins. It’s the rich get richer problem.
Proof-of-burn has also been called a high risk protocol, as there is no guarantee that a user will ever recover the full value of the coin being burned
Cryptocurrencies Using Proof of Burn
There are several examples of coins using proof-of-burn, and it is becoming increasingly popular as a choice of a consensus protocol. Probably the best known example of a PoB coin is Counterparty (XCP), which uses PoB to seed its tokens. Bitcoin are sent to an unspendable address and users receive Counterparty tokens in return.
There are others such as Slimcoin (SLM), which burns coins as a mining method and consensus mechanism, and Triggers (TRIG), which is based on the Counterparty protocol
Proof-of-burn is a novel method for reaching consensus on the blockchain, and given its promise of maintaining decentralization, and lack of resource intensive mechanism it could become increasingly used.
Some projects have already utilized some coin burning simply as a way to help stabilize and increase the price of their tokens, making them more attractive to investors.
Have any of you purchased any Proof-of-Burn cryptocurrencies? Do you think PoB is superior to other consensus methods such as proof-of-work and proof-of-stake? I would love to hear your thoughts.
Images via Fotolia
Disclaimer: These are the writer’s opinions and should not be considered investment advice. Readers should do their own research.