What Is a Proof of Burn for Cryptocurrency?

Proof of burn is one of the several consensus mechanism algorithms implemented by a blockchain network to ensure that all participating nodes come to an agreement about the true and valid state of the blockchain network. This algorithm is implementing in order to avoid the possibility of any cryptocurrency coin double-spending.

Proof of burn follows the principle of “burning” the coins held by the miners that grant them mining rights.

Key Takeaways

  • Cryptocurrencies use several methods to validate the data stored on their blockchains, including a method called "proof of burn."
  • Proof of burn is the third attempt at creating a system to deter fraudulent activity on a blockchain, while also improving the functioning of the blockchain as a tool for transactions.
  • Proof of work and proof of stake are also methods for preventing fraudulent activity on a blockchain; proof of work is the system employed by the original and most popular cryptocurrency, Bitcoin.

Understanding Proof Systems

The blockchain is the primary database of a cryptocurrency. It holds all transaction-related information on blocks and those blocks act as the data storage units of the blockchain. A block is written only when the blockchain nodes agree on a set of transactions that the nodes consider valid.

Due to the autonomous and decentralized nature of the blockchain network, an automated mechanism is required to ensure that the participating nodes agree on only the valid transactions. This important task is performed by consensus-mechanism algorithms.

Proof of Work

The most well-known type of consensus-generating algorithms are called proof of work (POW). In a POW system, miners are rewarded for updating the blockchain. This entails using computing power to solve a mathematical equation and results in a monetary reward. Bitcoin, the original and most popular cryptocurrency, uses a POW system.

The more a miner pays for the computing equipment required to solve the cryptographic puzzle, the higher the chance that they will score the right to mine the blocks. However, a POW approach requires costly mining hardware devices and this method is hampered by high power consumption.

Because the POW method is so resource-intensive, it's not very efficient. Consequently, POW currencies, including Bitcoin, aren't very useful as a fungible instrument.

Proof of Stake

Proof of stake (POS) is another algorithm that allots mining rights to miners proportional to their stakes held in the cryptocurrency.

In this system, the blockchain is maintained by a randomly selected group of validators who “stake” the native network tokens by locking them into the blockchain to produce and approve blocks.

Unfortunately, the more complex construction of POS systems makes them more vulnerable to attacks, and because benefits flow increasingly to the largest coin holders, in a POS system, the richer you are, the richer you get.

Proof of Burn

Proof of burn (POB) is an alternative consensus algorithm that tries to address the high energy consumption issue of a POW system.

POB is often called a POW system without energy waste. It operates on the principle of allowing miners to “burn” virtual currency tokens. They are then granted the right to write blocks in proportion to the coins burnt.

Iain Stewart, the inventor of the POB algorithm, uses an analogy to describe the algorithm: burnt coins are like mining rigs. In this analogy, a miner burns their coins to buy a virtual mining rig that gives them the power to mine blocks. The more coins burned by the miner, the bigger their virtual mining "rig" will be.

To burn the coins, miners send them to a verifiably un-spendable address. This process does not consume many resources (other than the burned coins) and ensures that the network remains active and agile. Depending upon the implementation, miners are allowed to burn the native currency or the currency of an alternate chain, such as Bitcoin. In exchange, they receive a reward in the native currency token of the blockchain.

You can send out transactions to the network that will burn your own cryptocurrency coins. Other participants can mine/burn on top of your block, and you can also take the transactions of other participants to add them to your block. Essentially, all of this burning activity keeps the network agile, and participants are rewarded for their activities (both burning their own coins and burning other people’s coins).

To prevent the possibility of unfair advantages for early adopters, the POB system has implemented a mechanism that promotes the periodic burning of cryptocurrency coins to maintain mining power. The power of burnt coins “decays” or reduces partially each time a new block is mined. This promotes regular activity by the miners, instead of a one-time, early investment. To maintain a competitive edge, miners may also need to periodically invest in better equipment as technology advances.

Example of Proof of Burn

POB implementation can be customized. For example, Slimcoin, a virtual currency network that uses POB, allows a miner to burn coins that not only gives them the right to compete for the next block but also gives them the chance to receive blocks during a longer time period, for at least a year.

Essentially, Slimcoin’s POB implementation combines three algorithms: POW, POS, and the core POB concept. The process of burning coins utilizes POW; the more coins one burns the more chances one has to mine, thus ensuring POS; and the whole ecosystem follows the POB concept.