DEFINITION of Proof of Burn (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 thereby avoiding any possibility of cryptocoin double spending. Proof of burn follows the principle of “burning” or “destroying” the coins held by the miners that grant them mining rights.

BREAKING DOWN Proof of Burn (Cryptocurrency)

Blockchain is the primary database of cryptocurrency that holds all transaction-related information. Blockchain is formed by a chain of blocks, and all transactions are arranged and stored in these various blocks which act as 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 as valid.

Due to the autonomous and decentralized nature of the working 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 the consensus mechanism algorithms.

One of the most commonly followed consensus algorithm includes proof of work (POW). The more a miner pays for the computing equipment required to solve the cryptographic puzzle, the better chances he/she scores the right to mine the blocks. However, this POW approach is hampered by high power consumption and the need for costly mining hardware devices. Proof of stake (POS) is another algorithm that allots mining rights to the miners proportional to their stakes held in the cryptocurrency.

Proof of burn (POB) is an alternative consensus algorithm that tries to address the energy consumption issue of POW. POB is often called POW without energy waste. It works on the principle of allowing the miners to “burn” or “destroy” the virtual currency tokens, which grants them the right to write blocks in proportion to the coins burnt.

Iain Stewart, the inventor of POB algorithm, cites an analogy - Burnt coins are mining rigs. Essentially, a miner burns his/her coins to buy a virtual mining rig that gives him/her the power to mine blocks. The more coins burned by the miner, the bigger the ensuing virtual mining rig.

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 alternative chain, such Bitcoin. In exchange, they receive a reward in the native currency token of the blockchain.

You can send out transactions to the network that burn your own cryptocoins. Other participants can mine/burn on top of your block, and you too can take transactions of other participants to add them to your block. Essentially, all such burning activity leads to keeping the network agile, and participants are rewarded for their activities that include burning their own coins and other people’s coins.

To prevent any possibility of undue advantages for early adopters, the POB has intrinsically implemented a mechanism that promotes the periodic burning of cryptocoins to maintain mining power. The power of burnt coins “decays” or reduces partially each time a new block is mined, similar to the mining rigs becoming obsolete with the passage of time. It promotes regular activity by the miners, instead of the one-time early investment. To remain in the game with a competitive edge, miners may also need to invest periodically in better equipment similar to the work done in physical mining rigs with advancement in technology.

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

Essentially, Slimcoin’s POB implementation combines three algorithms – POW, POS, and the core POB concept. The process of burning coins involves POW, the more coins one burns the more chancesone has to mining rights which ensures POS, and the whole ecosystem follows the POB concept.