The blockchain is an extremely innovative invention. However, in order to function, it needs a consensus algorithm that is both efficient and secure. Such an algorithm ensures validity and safeguards the blockchain from manipulation. Proof of work (PoW) and proof of stake (PoS) are the most commonly used consensus algorithms in cryptocurrency.
However, there are a number of alternative methods that few people have heard of. One such method of consensus is proof of burn (PoB). This requires a user to burn a mined proof of work cryptocurrency such as Bitcoin in exchange for mining privileges or the coins or tokens of an alternative currency.
So how does proof of burn work?
The way proof of burn works is that miners send coins to an unspendable address (also known as an eater address), effectively burning them. Once coins are burned, they cannot be accessed and spent again. Because proof of burn transactions are recorded on the blockchain, there’s necessary proof that the coins can no longer be used, and the user can be rewarded as a result.
The idea behind proof of burn is that by burning a cryptocurrency, a user is demonstrating a willingness to undergo a short-term loss for a more long-term investment. Users are rewarded over time through the proof of burn reward mechanism when mining, earning a lifetime privilege to mine on the system. The more coins a user burns, the greater the chance he or she will have of mining the next block.
Proof of burn can be implemented in different ways. For example, the coin burned may be that of the native currency or that of an alternative currency. With proof of burn, your stake declines over time. Much like with Bitcoin and the need to invest in increasingly powerful mining hardware as time goes by, you’ll want to burn more coins over time in order to maintain your odds of being selected for mining the next block.
Eater addresses are used in proof-of-burn algorithms to store coins that can never be spent. Eater addresses are valid Bitcoin addresses that were generated randomly and not from a specific private key. Since you can’t backward-calculate a private key from a Bitcoin address, these eater addresses are basically unspendable. Here’s an example of an eater address that has already accumulated a very large amount of money that is lost forever.
What are the advantages of proof of burn?
It could be argued that having a proof-of-burn protocol encourages long-term involvement in a project. If there’s a higher percentage of long-term investors, the price could have greater stability. Also, proof of burn helps determine the distribution of cryptocurrency in a fair and decentralized way. This is in contrast to the proof of work used in the likes of Bitcoin, where we’ve seen the rise of ASIC miners and the centralization of mining. Overall, proof of burn seems to be a good way of seeding new currencies.
What are the disadvantages of proof of burn?
One criticism of proof of burn is that like proof of work, it still involves the wasting of resources. Also, mining power goes to those who are willing to burn more money. This is a problem similar to proof of stake, by which it’s argued that the rich get richer. Much like with other consensus protocols, there’s no guarantee that a user will recover the value of the coin burned, which makes proof of burn fairly high risk.
Which cryptocurrencies have implemented proof of burn?
Examples of implementations of proof of burn include Slimcoin (SLM) and Counterparty (XCP). In the case of Slimcoin, proof of burn is used as its consensus algorithm and mining method. In contrast, Counterparty uses proof of burn for seeding its tokens. Those participating sent bitcoins to an unspendable Bitcoin address and received the Counterparty tokens in return.
Have you had any experience with a proof-of-burn cryptocurrency? Which consensus algorithm do you think is best? Let us know in the comments below!