What Is Proof-of-Burn (PoB)?

UTC by Beatrice Mastropietro · 9 min read
What Is Proof-of-Burn (PoB)?
Photo: Unsplash

Proof-of-Burn is a consensus algorithm that uses the burning of coins to create value. This guide will explore what Proof-of-Burn is, how it works, and its advantages over other consensus algorithms such as proof of work.

Proof-of-Burn (PoB) is a method of securing cryptocurrency networks through the destruction of coins. To create a new block and receive the associated rewards, a miner must submit a Proof-of-Burn transaction. This transaction sends a certain number of coins to an address that will never be used again. These coins are then destroyed or “burned.”

Proof-of-Burn is a  real-world investment to become a miner. You can’t create a new block by burning random coined. To participate in the network, you have to sacrifice something valuable. This helps ensure that only serious players are involved and ensures the stability of the network.

Proof-of-Burn was first implemented by CounterParty (XCP) in January 2014 to help secure their blockchain. Here’s how it works: XCP had 663 total coins before implementing Proof-of-Burn. Afterward, there were still 663 coins in circulation, but no new coins would ever be created. Blocks were mined at two-minute intervals, with each block awarding five new coins to the miner that found it. Since this took place on top of Bitcoin (BTC), XCP miners also received all transaction fees for every trade executed on the CounterParty platform.

There are key differences between traditional Proof-of-Work (PoW) mining and Proof-of-Burn (PoB). In PoW mining, the number of coins that a miner can create is unlimited. As long as they have enough computing power, they can continue creating new blocks and earning rewards. With Proof-of-Burn, the number of coins in circulation is fixed. This means that there is a finite amount of rewards available for miners, which helps to prevent inflation.

Another key difference is that the mining process is much slower with Proof-of-Burn. To create a new block, you first need to find an unused address and submit proof of burn transaction.

Here’s how it works. Newly mined coins will go into an unspendable address for 512 blocks and become spendable again. The spending process requires sending a special type of transaction called an OP_RETURN transaction which includes the block header’s hash. Once the transaction is sent, some coins will automatically be burned, and a new block will be created.

After their successful initial coin offering (ICO), they implemented a Proof-of-Burn method where approved users could burn their own PTS tokens in exchange for a certain amount of Counterparty (XCP). This helped to distribute XCP evenly among everyone who wanted it at the time.

Burning your coins makes them scarce, which usually drives the price higher. Also, if you want to get in at the ICO stage for a new Proof-of-Stake token, burning some BTC or altcoins will likely raise demand while lowering supply. This is widely known as the bootstrapping effect.

How Proof-of-Burn Works

Burning coins simply means sending coins to a verifiably unspendable address, so they are effectively destroyed. The process of burning coins is sometimes called ‘destroying’ coins, but the reality is that the coins aren’t being burned because their data still exists on the network. Instead, it’s better to think of burning as an irreversible public action where the coins are sent to a place where they’re no longer spendable.

The term “Proof-of-Burn” refers to locking some amount of cryptocurrencies (usually Bitcoins or other digital assets), i.e., sending them to an unspendable address in exchange for tokens on some other blockchain. The locked cryptocurrencies are effectively destroyed, as they can no longer be used for anything other than exchanging for the new tokens.

The idea behind Proof-of-Burn (PoB) is that it creates a “negative mining” incentive. In other words, to create new tokens, someone must first destroy some existing ones. This makes it more difficult to create new tokens, as it requires investing real resources (i.e., burning coins). This helps to protect the value of the new tokens and prevent them from being devalued by excessive inflation.

Proof-of-Burn is often used in blockchain projects that issue their tokens, as it provides an extra layer of security against devaluation and inflation. It also encourages users to hold onto their tokens rather than sell them, as they can only be redeemed by destroying other cryptocurrencies.

In a typical proof-of-burn scheme, a public key (comparable with an account number) is created upon which satoshis are sent. Using this public key, you can check how much “virtual Bitcoin” has been burned at any given time by anyone realizing that public key (i.e., generating it). The more satoshis sent to the key, the more “Proof-of-Burn” it represents.

Proof-of-Burn vs. Proof-of-Work vs. Proof-of-Stake

There are a few different types of proofs that can be used to verify transactions on a blockchain. The three most common are Proof-of-Burn (PoB), Proof-of-Work (PoW), and Proof-of-Stake (PoS).

Proof-of-Burn is a method where new coins are created by burning a certain amount of an existing coin. This is done by sending the coins to a special address that can only burn them. Once the coins have been burned, they are destroyed and cannot be used again. The new coins are then created by taking the total number of burned coins and dividing it by the total number of coins in circulation.

Proof-of-Work is a system where new coins are created by solving a difficult mathematical problem. The first miner to solve the problem is rewarded with a certain number of new coins. This system is used to prevent people from creating fake coins by solving the problem faster than everyone else.

Proof-of-Stake is a system where new coins are created by holding a certain amount of an existing coin. This is done by sending the coins to a special address that can only stake them. Once the coins have been staked, they are locked up and cannot be used again. The new coins are then created by taking the total number of staked coins and dividing it by the total number of coins in circulation.

Examples of Proof-of-Burn (PoB)

The company committed to implementing the PoB strategy and claims that it can be tailored. Slimcoin, a virtual currency network that utilizes PoB, gives miners the option of burning coins to gain access to the next block and blocks for at least a year after that.

Essentially, Slimcoin’s PoB implementation combines three algorithms: PoW, PoS, and the basic PoB concept. The process of burning coins is carried out using PoW. The more coins are burned, the greater are chances of mining. As a result, everyone in the ecosystem follows the PoB principle.

Advantages of Proof-of-Burn

There are many advantages to using Proof-of-Burn (PoB) as a consensus mechanism. Some of the key benefits include:

  • Increased security and censorship resistance. Proof-of-Burn is more secure than other mechanisms because it is more difficult to game the system or attack it. In addition, it is much more difficult to censor transactions or block nodes participating in the network. This makes it a more resilient option for businesses and individuals who need to ensure their data is safe and cannot be censored.
  • Reduced energy consumption. One of the main criticisms of Proof-of-Work is that it requires a lot of energy to operate. Proof-of-Burn does not have this issue, making it more environmentally friendly. The process of “digging” in PoW does require a lot of energy, but this energy is wasted and should not be considered productive.
  • No centralization issues. In other consensus mechanisms, miners have become highly influential over the network because they control so much hashing power. This allows them to 51% attack the network, censor transactions, and even change the rules that validate new blocks. This is not possible with proof-of-burn, as the consensus mechanism requires no miners at all.
  • Fair distribution of currency. Another issue with many alternative currencies is that their early adopters can own a disproportionately high percentage of coins. This can lead to instability and unfairness. Proof-of-Burn helps to prevent this by ensuring the distribution of new coins only to those who are willing to put their resources (i.e., computing power) towards the network.
  • Low barrier to entry. Unlike other consensus mechanisms, PoB does not require expensive hardware or a high level of skill to participate in. The only thing needed is computing power. This makes it easier for people to get started, especially when the alternative currencies are still in their infancy.

Disadvantages of PoB

Several disadvantages have been identified with this consensus mechanism, including:

  • A large initial investment. One of the major criticisms is that PoB requires a large initial investment to participate. Because you must burn coins, your only other option is to buy them in exchange. This means that you would likely need many thousands or millions of dollars just to get started.
  • Going against the decentralized nature of cryptocurrency. The key reason cryptocurrencies attract people is decentralization. In other words, there is no one central authority controlling it. Proof-of-Burn goes against this by controlling those who hold the most coins.
  • Risk of speculation. A potential issue with PoB is that it could be used for speculation. This means that people could buy up coins, wait until they have a large supply, and then use them to create blocks. This would give them control over the network and could lead to instability.
  • Risk of hoarding. Another potential issue is that people could use PoB to hoard coins. This would limit the available supply and could lead to an increase in value. While this is good for those who hold the coins, it is not good for the overall health of the currency.
  • Attacking other currencies. Proof-of-Burn could attack other currencies. This means that someone could buy up a large supply of a certain coin, use it to create blocks, and then dump the coins on the open market. This would lead to a devaluation of the currency and be very harmful.

Bottom Line

Proof-of-burn (PoB) is a process where cryptocurrency holders use their coins to burn them by sending them to an unspendable address. Doing this destroys the coins, and in return, they are rewarded with new tokens. The idea behind PoB is that it creates scarcity for the new tokens, which then drives up demand. One of the main advantages of PoB is that it does not require expensive mining hardware to distribute coins or secure its network.

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FAQ

What is Proof-of-Burn?

Proof-of-Burn (PoB) is a method of securing cryptocurrency networks through the destruction of coins. To create a new block and receive the associated rewards, a miner must submit a Proof-of-Burn transaction. This transaction sends a certain number of coins to an address that will never be used again. These coins are then destroyed or “burned.”

How does Proof-of-Burn work?

The idea behind Proof-of-Burn (PoB) is that it creates a “negative mining” incentive. In other words, to create new tokens, someone must first destroy some existing ones. This makes it more difficult to create new tokens, as it requires investing real resources (i.e., burning coins). This helps to protect the value of the new tokens and prevent them from being devalued by excessive inflation.

What is the difference between PoB, PoW, and PoS?

Proof-of-Work (PoW) is a system in which miners solve a cryptographic puzzle to validate transactions and create new blocks. Proof-of-Stake (PoS) is a system in which your coinage determines the likelihood that you will be chosen to create a new block and receive block rewards. Proof-of-Burn (PoB) is a system in which your coins are sent to (what will be) an unspendable address, and then you receive rewards based on the number of coins burned.

What are the benefits of Proof-of-Burn?

Proof-of-Burn provides increased security and censorship resistance, reduced energy consumption, no centralization issues, fair distribution of currency, and a low barrier to entry.

Are there any risks associated with Proof-of-Burn?

The act of burning coins can be risky, as it can lead to a loss of funds if the cryptocurrency is not worth the amount that was burned. In addition, there is always a risk of accidental or fraudulent destruction of coins.

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