What is Proof of Burn & Which Coins Use It?

What is Proof of Burn & Which Coins Use It?

Blockchains have revolutionized finance and computing since their introduction more than a decade ago, with the first, Bitcoin, intended as a direct and poignant response to the global financial crisis of 2008.

Even disruptive technology can be challenged, though, and Bitcoin’s vaunted proof-of-work consensus is being challenged by innovative new options such as proof of burn.

Much is known about proof of work and its closest competitor, proof of stake. But what other options are there? This article will dive into one of the most exciting new contenders in proof of burn, and examine exactly how it works.

What is a Blockchain?

Blockchains are distributed networks of computers that reach consensus on transactions and network states using a consensus algorithm. Bitcoin’s Proof of Work (PoW) and Ethereum’s Proof of Stake (PoS) are great examples, but other algorithms, such as Proof of Burn (PoB), are beginning to emerge.

These consensus algorithms are vital beyond almost anything else for their blockchains because they keep the network secure and ensure that transactions you perform are verified and validated.

This is what separates blockchains from how the traditional financial system works. If you have a bank account, the balance and transactions related to that account are purely subject to the whims and vagaries of that bank.

Worse yet, record-keeping failures are rampant on Wall Street. Perpetrators such as JPMorgan Chase, whose employees used WhatsApp to circumvent record-keeping regulations, have been taken to task publicly, but fines are considered by these companies to be a small cost of doing business.

Blockchains, by contrast, are decentralized. This means that even if banks are present as blockchain validators, they can’t unilaterally fiddle with your account or mess with the records. Consensus algorithms like Proof of Burn ensure that the truth is told, since all the decentralized network nodes can have their say and call out bad actors.

What is Proof of Burn?

Proof of Burn is sometimes called a Proof of Work system without the inherent energy waste. It isn’t to be confused with the process of “burning” a currency or a token to mint another or reduce a coin’s supply and provide documentary proof of the fact.

The Proof of Burn consensus algorithm was invented by Iain Stewart, who compared burned network coins to mining rigs. Within his analogy, a miner burns coins to buy a virtual mining rig that gives them the power to mine blocks. The more coins burned, the bigger and more powerful the virtual rig is.

Proof of Work is a tried and tested consensus algorithm for blockchains and continues to secure the “OG” crypto, Bitcoin. However, it is often criticized for its perceived wastage of energy since miners must deploy specialized computing equipment at an industrial scale to succeed.

This wasn’t intended by pseudonymous Bitcoin creator Satoshi Nakamoto, with Bitcoin originally mined on PC CPUs, but technological breakthroughs are never far away when there’s profit to be had.

How Does Proof of Burn Work?

The first step in executing the PoB consensus algorithm is to burn network coins. This is accomplished, as with other forms of burning crypto, by sending them to a network address that is verifiably un-spendable.

These addresses, generally called “eater addresses,” are usually randomly generated and don’t have any private key associated with them. Without private keys, nobody can access them and use the coins or tokens contained within.

Exactly what coins are burned depends on the exact implementation of the consensus and could actually include burning the coins of another chain. This destruction of assets is viewed as a demonstration of commitment to the network, which in turn confers the right to produce blocks and validate transactions.

Once a miner is allowed to produce blocks, they’re in with a chance of winning the block reward. The constant coin burns keep the network ticking over, and greater coin burns by a miner grant them a greater chance to become the next block producer and earn the block reward.

Burning assets in this manner is analogous to investing, either on coins in PoS or hardware in PoW. As such, PoB miners aren’t required to invest in any physical resources since their investment is made in the form of coins or token burns.

Proof of Stake vs. Proof of Burn

Proof of Stake is an extremely popular method of reaching blockchain consensus because it eliminates the hardware requirements of proof of work and assures a reduced environmental footprint. Many PoS networks can be validated using minimal hardware; in some cases, they are even manageable on a minimum-spec modern PC.

PoS relies instead on validator node operators purchasing and then locking up a certain amount of network coins. In this sense, PoS is extremely similar to Proof of Burn since both require some sort of investment and then take the coins out of the supply to create scarcity.

That’s when the two mechanisms diverge. Proof of Burn sends these coins to an eater address, meaning that the scarcity created is permanent. Proof of Stake validators, on the other hand, can actually unstake their coins. This is usually subject to some sort of limitation in terms of how long it takes to unstake, but staking is never permanent.

Once fully unstaked, those coins can then be sold. Therefore, the scarcity created via PoS is temporary compared to the permanence of coin burning.

Proof of Work vs. Proof of Burn

Proof of Work is perhaps the best-known consensus algorithm because it is used in Bitcoin and most of the first and early second-generation cryptocurrencies.

PoW relies on raw computing power, meaning that miners have to invest in purchasing and maintaining mining equipment as well as the energy required to power their rigs. In that sense, PoW converts energy into coins, which is often how the inherent value of PoW coins is described.

This use of energy and the relative resource-intensiveness of PoW are big distinctions from Proof of Burn, since the latter doesn’t have anywhere near the same energy footprint. Similar to PoS, PoB mining can be done on minimal hardware.

Furthermore, the investment involved in PoW, in terms of buying mining hardware, can be considered less liquid than PoS. Hardware depreciates, and new models make older ones obsolete. Nevertheless, there is a resale market for used crypto mining gear, and therefore the miner’s investment isn’t lost with the same finality as in Proof of Burn.

Examples of Proof of Burn

Proof of Burn is a very new consensus mechanism regarding blockchain technology, and hasn’t yet seen adoption by any of what could be regarded as major blockchain networks. However, its characteristics and advantages compared to several other consensus algorithms may mean that adoption isn’t very far away.

One of the best-known examples of proof of burn consensus is Slimcoin, a project that executes proof of burn, as detailed in this article, to secure its network. Counterparty is another project that uses proof of burn, but slightly differently.

Counterparty uses proof of burn to seed its tokens, meaning that users send BTC to an unspendable address and receive Counterparty’s XCP token. This implementation of proof of burn is sometimes criticized since it uses a high-energy PoW cryptocurrency, Bitcoin, as part of the protocol.

Advantages of Proof of Burn

Proof of Burn is a new method of attaining network consensus and has several theoretical advantages compared to other available systems:

• Greener. Proof of Burn is often considered more sustainable than alternatives like proof of work because, like proof of stake, it places no major emphasis on the power or quantity of hardware.
• Tokenomics. Coin burns permanently reduce the supply of the cryptocurrency being burned, leading to increased scarcity and asset value.
• Commitment. Encourages long-term commitment to the project since burning coins is permanent, unlike staking.
• Low barrier to entry. Becoming a Bitcoin miner is impossible without significant expenditure. Proof of burn miners only need to buy coins to burn them, which is far easier and less costly.

Disadvantages of Proof of Burn

Even the best methods of consensus are criticized for one facet or another of their implementation. No consensus algorithm has been able to check all the boxes yet, but many provide secure and functional ways to operate a blockchain.

Here are some of the common arguments against using the proof of burn consensus algorithm:

• Resource waste. While proof of burn consensus doesn’t require as many resources as proof of work when it comes to hardware, it destroys the coins created through computation, which is a waste. Using of PoW coins like Bitcoin to engage in PoB lends more credence to this argument.
• Concentration of wealth. Like proof of stake, proof of burn tends to favor network participants with more native coins or network wealth. In PoS, the more you stake, the more rewards you earn. That holds true for PoB as well.
• Risk. On the other hand, PoS offers a certain level of security because you can unstake your coins and sell them if you lose faith in the project. In PoB, burning is final, and you are locked in with far more finality and without any real guarantee that you can recover the full value of coins you burned.

Key Takeaways

Proof of burn is a new development in blockchain consensus that attempts to be the best of both worlds when regarding proof of work and proof of stake consensus. It fits more in line with proof of stake when it comes to hardware and energy consumption but takes a more invested road when it comes to the finality of coin burns.

Given the decades and even centuries of use a lot of other fundamental systems have enjoyed, blockchain and decentralized network consensus can be considered still in its infancy. Proof of burn is an experimental evolution of what proof of work and proof of stake have established, and it remains to be seen how much traction it receives among industry participants.

Proof of Burn FAQ

#1. What cryptos use proof of burn?

Proof of burn is still a relatively new form of blockchain consensus, so it isn’t widely used. The protocols that use PoB in various forms currently include Slimcoin and Counterparty.

#2. What is the benefit of proof of burn?

Proof of burn, depending on its implementation, can match PoS when it comes to its minimal energy footprint. It also encourages more long-term, dedicated network participation than proof of stake since coin burning is permanent while staking is temporary.

#3. What is proof of stake and proof of burn?

Proof of stake involves the locking up of network coins to a protocol, much like a deposit or a bond. This isn’t permanent, though, and the node operator can unstake coins after a given amount of time and sell them if desired. Proof of burn changes this dynamic to a permanent investment since burning coins makes them unrecoverable.