Like its more popular counterparts, Proof-of-work, and Proof-of-Stake, Proof-of-Burn is a blockchain consensus algorithm that verifies a cost was incurred in “burning” a coin.
Because of the way blockchains work, there is usually always a consensus mechanism needed to provide validity to transactions. In the more popular Proof-of-work consensus mechanism, this is done through computational power. Miners use electricity and energy to mine and validate transactions meaning they are incentivized to be good actors in the process. Proof-of-Stake, another popular method, works to incentivize parties by having them stake their cryptocurrency in the project in order to validate transactions.
When it comes to Proof-of-burn, virtual mining rigs are used instead of physical ones to validate transactions. Simply put, PoB miners initiate coin burns as a way to show their involvement in the network and be allowed to mine.
Coin burns are more well known as ways in which to remove tokens from circulation. A coin burn is often done to actively reduce inflation as there are fewer coins available which in turn boosts demand. However, with PoB, it is an inactivation mechanism to make sure there is involvement in the network.
What the network is looking for in PoB is how many coins a miner is burning using their virtual mining power. The more coins that a miner burns indicate the more power they are using and thus how involved they are in the network. More coins being burned, means there is more power in the network, and thus improves the speed of finding new blocks. Consequently, the miner earns more rewards and this is the primary incentive in Proof-of-Burn.
The actual destruction, or burn, of the coin happens by miners sending the coins to an “eater address.” This address is publicly verifiable but inaccessible. They are inaccessible as these addresses are randomized and they don’t have private keys.
There are touches of proof-of-Work as well as Proof-of-Stake when it comes to PoB. In relation to PoS, PoB also involves interaction with coins to secure the network. However, unlike PoB, coins locked in PoS systems aren’t permanently erased. If the person who put the coins up wants to, they can access those coins and sell them to leave the network. These coins are then returned to the market, whereas with PoB, the coins are erased and it helps with scarcity.
Feature of PoB
- Relatively new consensus algorithm and untested on large networks
- Leads to growing coin scarcity
- Similar to staking in that users put up their coins
- Also similar to PoW in that more burning means more control of the network
- Higher burn rate means quicker block solves and thus more rewards
While PoB is relatively untested on bigger blockchain networks, it does have a few theoretical advantages. One primary concern with PoW is its energy consumption, but this mechanism is energy efficient. It also leads to a high degree of decentralization as coin burning is relatively simple to achieve for all network participants.