What is Proof of Burn?

Introduction

As cryptocurrency and blockchain technologies advance, the consensus mechanism undergoes continuous evolution. Various consensus algorithms are employed within the blockchain ecosystem, with Proof of Work (PoW) and Proof of Stake (PoS) standing out as popular choices. Despite the absence of a universally perfect consensus mechanism for all cryptocurrencies, the crypto industry’s ability to fully realize its potential centers on discovering a suite of mechanisms that are secure, efficient, and transparent. The existence of diverse consensus mechanisms marks a crucial stride toward achieving these objectives. Among these innovations is the Proof of Burn consensus mechanism, a relatively recent addition already adopted by various blockchain systems.

What is Proof of Burn and How is it Different from Proof of Work?

To grasp the concept of Proof of Burn and distinguish it from Proof of Work, it’s essential to understand the meaning of crypto-burning. In simple terms, burning cryptocurrency involves the permanent removal of tokens from circulation. This is achieved by sending the tokens to burn addresses, commonly referred to as eater addresses. Burn addresses exist within the system but without a private key, rendering them unable to access the contents.

A burn address is like an email address for which you lack the password to access the inbox. Although people can still send emails to this address, you cannot access the information contained therein because you do not have a password. That’s how the eater address works.

Why Burn Coins?

Burning, in cryptocurrency, involves the irreversible destruction of digital assets in a verifiable manner. This process can be compared to reducing the availability of a commodity in the market by destroying or “burning” it. When cryptocurrency is burnt, supply is diminished and scarcity is created. This scarcity, in turn, can potentially lead to an increase in the value of the remaining tokens, as heightened demand often accompanies reduced availability.

It’s important to note that the impact of burning on cryptocurrency prices is not instantaneous. The value of cryptocurrencies does not surge overnight solely due to the act of burning. Instead, the dynamics of supply and demand gradually come into play, and over time, the reduced supply may contribute to upward pressure on prices as demand increases in relation to the limited availability of the remaining tokens.

History of Coin Burning

The practice of coin burning predates the widespread adoption of cryptocurrencies and finds its inspiration in the concept of stock buybacks. Stock buybacks are a situation whereby a company repurchases its own shares from the market. The similarities between stock buybacks and crypto burning are evident in several shared concepts. The trend of crypto burning gained prominence around 2017 and 2018 when many cryptocurrency projects initiated token burns as a strategy to reduce supplies and enhance value.

Notable cryptocurrencies, including Binance Coin (BNB), Bitcoin Cash (BCH), and Stellar (XLM), engaged in significant token burns during this period. Various cryptocurrencies have undergone the burning process, where tokens are either destroyed or sent to designated eater addresses. Here are a few significant examples:

1. Binance (BNB) began a quarterly coin-burning process in 2017, with the intention to reduce its coin supply until only 50% remained in circulation.

Source: Binance X Account — Announcing the burning of Binance coin (BNB)

1. The Stellar Development Foundation executed a substantial burn, destroying about 55 billion XLM coins in 2019.

2. The developers of Shiba Inu allocated 50% of their token supply to Vitalik Buterin in 2021. Subsequently, 90% of those tokens were burned, and the remaining portion was donated to charity. To learn more about crypto burning, read Crypto burning and why Bitcoin doesn’t need one.

What is Proof of Burn for Cryptocurrency?

Proof of Burn (PoB) is a blockchain consensus algorithm characterized by minimal energy consumption in comparison to Proof of Work (PoW). A consensus algorithm is a procedure through which all participants in a blockchain network collectively establish an agreement on the current state of a distributed ledger. Any crypto mining websites that employ Proof of Burn (PoB) mandate that each miner reaches a consensus by burning coins. However, to gain a comprehensive understanding of Proof of Burn, it is necessary to delve into the fundamentals of Proof of Work (PoW).

What is Proof of Work (PoW)?

Proof of Work (PoW) is a predominant consensus-generating algorithm, where miners are rewarded for updating a blockchain. In this method, miners employ substantial computing power to solve intricate mathematical equations, thereby assigning a monetary value to their efforts. The higher the computing power applied by a miner to solve a cryptographic puzzle, the greater the likelihood of earning the right to mine blocks. However, this process entails the use of expensive computing hardware that consumes significant amounts of electricity. Read more about Proof of Work on our website.

Source: CoinGape

Proof of Burn (PoB) addresses these challenges by offering an energy-efficient alternative to PoW. Instead of relying on power-intensive and costly computer hardware, PoB adopts a distinctive approach. The inventor of the PoB consensus algorithm, Ian Stewart, elucidates this concept through an analogy. Stewart likens burnt coins to physical mining rigs. Crypto miners burn their available coins to acquire virtual mining rigs instead of traditional computing hardware. This strategic move provides miners with the ability to mine blocks without solving complex cryptographic puzzles. Therefore, the more coins a miner burns, the more potent their virtual mining rigs become, subsequently increasing their mining power.

How Proof of Burn (PoB) Works

The Proof of Burn (PoB) consensus algorithm operates through a process where participants demonstrate evidence of burning or destroying coins, commonly referred to as a coin burn or cryptocurrency burning. To illustrate, consider the example of Kate, who decides to burn some of her coins and subsequently needs to convince Rex or another party that the coins have genuinely been burned. To establish this, she provides proof, allowing the recipient to verify the authenticity of the coin burn.

In PoB, all participants are required to present proof of having burned or destroyed coins. Despite the term “burn,” these coins are not physically destroyed but are permanently removed from circulation and sent to “Eater Addresses”. These addresses are accessible to all network participants, enhancing privacy, and the coins stored in Eater Addresses become inaccessible. Continuous crypto burning leads to a reduction in the total number of coins in the system, creating artificial scarcity.

In the PoB algorithm, a miner invests a portion of their assets in purchasing tokens or cryptocurrencies specifically for the purpose of burning. This act serves as a demonstration of trustworthiness and commitment to the network. The more coins a miner cumulatively destroys, the greater the likelihood of being selected to validate a blockchain block. This mechanism rewards the risk taken by the investor.

Source: Faster Capital

Let’s consider a case study. In a consensus algorithm, there are eight miners. Each of these miners has their own block of transactions. According to the Proof of Burn algorithm, they have to burn some of their coins to be able to add their block of transactions to the network. In order to do this, each miner sends these coins to an eater address, hence burning the coins in the process.

Among the participants in this network, Kate burns the most coins. So, she wins and this allows her to add her block of transactions to the network. However, before Kate’s block can be added to the chain, she will need to provide proof to the other network validators that she has burned it and that her block is valid. When they all reach an agreement, ascertaining that she has provided a valid transaction, her block will be added to the network.

If Kate’s block was found invalid, it would not be added to the network. And the second-highest participant in the network, e.g., Rex, gets the chance to add a new block.

Source: Faster Capital

While it may initially appear that PoB carries a high risk of losses, the system safeguards miners by offering a reward for each block, which offsets the initial investment, but this reward is realized over the long run. PoB-based systems also integrate a mechanism that encourages periodic crypto burning to maintain mining power.

This means the power of burnt coins reduces with each new block mined, potentially reaching zero. This approach prevents early adopters from gaining an unfair advantage and encourages regular crypto burning by all participants, rather than a one-time investment. Miners can only gain a competitive edge by investing in more advanced technology and equipment.

Current Applications of Proof of Burn (PoB)

Several cryptocurrencies have adopted the Proof of Burn (PoB) consensus-generating algorithm, with more expected to follow suit. Some notable examples include:

• Slimcoin (SLM): An open-source cryptocurrency that utilizes a combination of Proof of Burn (PoB), Proof of Stake (PoS), and Proof of Work (PoW) for the creation, mining, and burning of tokens.
• Counterparty (XCP): This cryptocurrency exclusively employs PoB for token creation on top of the Bitcoin blockchain. Participants transfer Bitcoin to an eater address and receive Counterparty tokens (XCP) in exchange. Counterparty leverages Proof of Burn to validate transactions and has achieved notable success, as evidenced by its strong user base.
• Factom (FCT): This cryptocurrency employs a more complex process involving the burning and minting of tokens. Unlike SLM and XCP, Factom’s token creation is continuous and adheres to the project’s monetary policy. Tokens are burnt as more are introduced to the system, contributing to the intricacy of its tokenomics.

Pros and Cons of Proof of Burn

The development of Proof of Burn aimed to address issues present in both Proof of Work and Proof of Stake, yet it carries its own set of drawbacks, which has somewhat impeded its widespread adoption among various cryptocurrencies. Let’s briefly explore the advantages and disadvantages of Proof of Burn.

Advantages

Source: Faster Capital

• Power Efficiency: Proof of Burn (PoB) stands out for its energy efficiency. While it may not rely entirely on renewable energy, its power consumption is notably lower compared to other consensus-generating protocols, like PoW making it a more sustainable and eco-friendly option.
• No Need for Mining Equipment: Unlike Proof of Work, Proof of Burn eliminates the need for expensive mining equipment or hardware. The burning of tokens and cryptocurrencies is carried out virtually, requiring less capital and space for setup. The absence of centralized entities outside the system contributes to its cost-effectiveness.
• Stability and Network Security: PoB promotes ongoing investment by encouraging participants to burn coins to enhance their mining power. This commitment leads to increased motivation among miners to safeguard their initial investment, contributing to the stability and security of the network.
• Enhanced Investor Commitment: Proof of Burn fosters long-term investment and commitment, ensuring price stability. This feature can add value to new tokens, making PoB a favorable method for improving the worth of tokens, particularly in the context of burning unsold cryptos from initial coin offerings (ICOs).
• Fair Coin Distribution: Among consensus algorithms, Proof of Burn stands out for its fairness in coin distribution. This characteristic sets it apart by providing a more equitable method for distributing coins compared to other algorithms.

Disadvantages

Source: Faster Capital

• Dependency on Other Processes: One notable drawback of Proof of Burn (PoB) is its reliance on other processes. The tokens participants burn to enhance their mining power may originate from other cryptocurrencies or consensus algorithms, depending on the platform. In cases where Proof of Work (PoW) is employed, this dependency reduces the power efficiency and eco-friendliness of PoB, undermining some of its environmental benefits.
• No Guarantee of Recovering the Initial Investment: Similar to other consensus algorithms, Proof of Burn poses a risk for users potentially losing their investments. The value of burnt coins may never be fully recovered, and there is no guarantee that participants will recoup their initial investment, introducing a level of uncertainty for those engaging in PoB.
• Slower Work Done Verification Process: Compared to Proof of Work (PoW), the verification process for work done by miners in Proof of Burn is notably slower. This reduced verification speed may impact the system’s overall efficiency, potentially leading to delays in transaction processing and block validation.

Proof of Burn (PoB) Vs. Proof of Stake (PoS)

PoS and PoB have one thing in common: they both require an initial investment by participants. In Proof of Stake, participants stake their coins by locking them up, and they retain a private key. If they decide to exit the network, they can unlock and sell these coins. However, Proof of Burn operates differently. In PoB, burnt coins are irreversibly sent to an eater address on the network, and there is no private key associated with these burned coins. Once burned, they cannot be recovered, and participants essentially forfeit them if they choose to leave the cryptocurrency network.

In the Proof of Stake model, coins are temporarily taken out of circulation when participants stake them, leading to no scarcity and minimizing resource wastage. Conversely, in Proof of Burn, miners permanently destroy their coins through the burning process, creating a supply crisis. The irreversible nature of burning coins contributes to the scarcity created by PoB, distinguishing it from Proof of Stake in terms of the permanence of the investment and its impact on the overall token supply within the network.

Conclusion

In conclusion, Proof of Burn (PoB) is a distinctive consensus-generating algorithm within blockchain networks that utilizes the burning of coins to generate value. Participants in the network engage in the act of burning by sending their coins to an eater address, rendering them permanently inaccessible. This intentional reduction in the circulating token supply contributes to the increased demand for PoB, driven by the artificial scarcity it creates.

A noteworthy advantage of PoB is its departure from the reliance on power-intensive computing equipment, a characteristic seen in other consensus algorithms. By doing so, PoB appears as a more energy-efficient and environmentally friendly alternative, aligning with the growing emphasis on sustainability in the blockchain space. As cryptocurrency evolves, Proof of Burn offers a unique approach to consensus-building that addresses economic and ecological considerations.