What is Proof of Burn in Blockchain?
An alternative to computationally demanding processes like Proof of Work (PoW) and Proof of Stake (PoS) is the consensus algorithm known as Proof of Burn in Blockchain (PoB).
Fundamentally, PoB asks miners to prove that they have wiped out a specific quantity of cryptocurrency. Sending coins to a “verifiably unspendable address,” from which they cannot be recovered, accomplishes this. Coin “burning” is regarded as an investment in the network, similar to running a virtual mining operation. According to the definition, “burning” is the process of destroying tokens on a blockchain network.
How Proof of Burn Works
The following is how the PoB mechanism works:
- A miner gains the ability to mine on the system by burning coins.
- The next block miner is chosen by a random selection mechanism.
- Importantly, a user’s odds of getting chosen to mine the following block increase with the number of coins they burn.
- Either native blockchain currency or coins from a different chain can be burned by miners.
- Miners receive block rewards after waiting the allotted amount of time; these benefits are meant to cover their initial investment over a certain amount of time.
- In the context of permissionless transaction verification, miners use the PoB consensus technique to confirm a transaction after it has been authenticated.
Relationship to Other Consensus Mechanisms
- PoB was put up as one of numerous consensus models intended to address some of the shortcomings of the original PoW model, with a particular focus on striking a balance between resource expenditure and fairness. Its main objective is to lower the energy usage related to PoW.
- The way the “investment” is managed is a crucial difference between PoB and PoS. PoB creates a shortage in the market by destroying validators’ coins forever. PoS, on the other hand, does not affect market scarcity because forgers (validators) can recover and sell their staked coins if they want to quit the network. However, PoS and PoB both demand network investment from users.
| Feature | Burn Proof (PoB) | Proof of Work (PoW) | Stake Proof (PoS) |
|---|---|---|---|
| The mechanism | To obtain mining rights, participants must burn currencies. | Miners work through challenging mathematics problems. | The quantity of coins that validators possess determines their selection. |
| Efficiency in energy use | Extremely energy-efficient | Energy-intensive | Energy-efficient compared to PoW |
| Effects on the Environment | Minimal effect | High-impact | In general, low |
| Decentralization | Promotes wider involvement | Centralization-prone | If wealth is concentrated, it may result in centralization. |
| Impact of Liquidity | Lowers the overall supply | Has no direct impact on liquidity | May affect liquidity based on the criteria for staking. |
| Intricacy | Quite easy | Complicated | More intricate |
| Adoption | Not as commonly used | Widely adopted | Growingly well-liked |
Benefits of Proof of Burn
- Sustainability and Energy Efficiency: Because PoB uses virtual resources rather than a lot of computing, it uses a lot less direct power than PoW, making it a highly sustainable technology. Its “Yes” grade for energy efficiency is further supported by a comparative investigation.
- No Dedicated Hardware Needed: In contrast to PoW, burning coins acts as the “virtual mining rig” and eliminates the need for pricey mining equipment.
- Deterministic Finality: In contrast to the probabilistic nature of PoW and PoS, PoB provides deterministic finality, a feature where transactions are confirmed conclusively.
- High Decentralization: PoB has a high degree of decentralization, according to this classification.
- High Scalability & Transaction Rate: PoB has a high transaction rate and scalability, according to several evaluations.
Limitations of Proof of Burn in Blockchain
- Centralization Risk (“Rich Get Richer”): One major disadvantage is the possibility of centralization. More coins allow users to burn more of them, increasing their mining power. Similar to centralization issues in PoW systems, this “rich get richer” dynamic has the potential to concentrate power.
- Lack of Transparency: Because burning money is not a transparent process, it may be challenging for an average user to independently confirm the burns.
- Indirect Environmental Impact: Although PoB uses less energy than other methods, there is a chance that the coins being burned were first produced by PoW mining. The fact that this initial creation process usually requires a lot of time and resources raises the possibility that the ecosystem as a whole may not be totally environmentally friendly because of where the digital assets came from.
- Risk of Investment Loss: If they are not chosen to validate a transaction and, as a result, do not receive a reward, participants risk losing their burned bitcoin.
- Low Throughput: According to one comparison investigation, PoB has low throughput despite claims of high transaction rates.
Applications of Proof of Burn in Blockchain
- Numerous cryptocurrencies, including as Redcoin, Triggers, Slimcoin, and Counterparty, have embraced Proof of Burn.
- It is widely used to offer a fair first distribution of a new currency or to launch new coin initiatives.
- Through a “one-way peg,” in which the value of the newly created altcoins is precisely proportionate to the quantity of burned bitcoins, it can make it easier to convert bitcoins into altcoins.
- Projects like MakerDAO (MKR) and Binance (BNB) also use token burning methods. In these situations, the goal is to reduce the number of tokens and possibly raise their price by purchasing native tokens back from the market and destroying them as funds enter the project. There has been discussion, nevertheless, about whether this actually qualifies as a “equity buyback” devoid of dividends.