The blockchain is an extremely innovative invention. However, in order to function, it needs a consensus algorithm that is both efficient and secure.
Such an algorithm ensures validity and keeps the blockchain safe from manipulation. Proof of work (PoW) and proof of stake (PoS) are the most commonly used consensus algorithms in cryptocurrency.
However, there are a number of alternative methods that few people have heard of. One such method of consensus is proof of burn (PoB). This requires a user to burn a mined proof of work cryptocurrency such as Bitcoin in exchange for mining privileges or the coins or tokens of an alternative currency.
How does Proof of Burn work?
The important thing to understand is that the raw computing power is not important to prevent manipulation by double spending. What is important is the cost of the computing power. It must be costly for an attacker to achieve the power to mine several blocks in a row.
PoB can be done in such a way that you send out a transaction which burns some of your money. Proof of burn’s significance is largely brought about by “burning tokens” in a unrecoverable manner such that it is easy to verify and extremely hard to undo.
If you burn the most (possibly combined with other criteria, a lot of proposals factor age of the coins in; not necessarily much of your money), you win.
Coins sent to the eater address are taken out of circulation and can no longer be spent. Verifying that coins have indeed been sent to an eater address is a straightforward process, as all PoB transactions are recorded on the blockchain. Once it is demonstrated that the coins can no longer be used, users can then be rewarded.
Sounds hard at first, I mean why would they give you transactions to put into your block, burning their money. However, it’s pretty obvious why they would to this: It’s necessary to tell others about the transactions burning their money in order to propagate their block.
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So you receive blocks burning other miner’s money, try to burn your own money on top of that block’s parent, burning that other miner’s money, too. If your block burns the most money, you win and get the block reward.
Is it profitable?
To prevent early adopters from benefitting too much or attacking the system , the power of burnt coins decays every time a block is mined. It doesn’t decay much, so don’t be afraid – you will have a lot of time. But this also mimics mining: Mining rigs eventually become obsolete because there is better technology available. So miners, to stay competitive, will have to renew their equipment sometimes. The same is true for Proof of Burn: if you want to maintain your minting power, you must burn coins periodically.
Like in Proof of Work, the block rewards are high enough to allow the participants to make a financial gain (profit) from minting. You won’t get back your investment in one hour or one day, but with some patience, in most situations you’ll eventually get significantly more coins that the ones you burnt.
Proof of burn has the advantage over Proof of Work that it does consume much less energy. So Slimcoin is your coin of choice if you ever have worried about Bitcoin’s environmental cost. But Proof of Burn has also advantages over Proof of Stake, another consensus method that minimizes energy use. We will cover this point in a later post.
Eater addresses
Eater addresses Eater addresses are used in proof-of-burn algorithms to store coins that can never be spent. Eater addresses are valid Bitcoin addresses that were generated randomly and not from a specific private key. Since you can’t backward-calculate a private key from a Bitcoin address, these eater addresses are basically unspendable. Here’s an example of an eater address that has already accumulated a very large amount of money that is lost forever.
Advantages of PoB
The real innovation with the PoB consensus algorithm is that it reshapes the type of cost that miners must bear in exchange for mining blocks. Instead of taking on financial costs related to hardware and electricity, miners in PoB protocols can simply burn their coins in order to mine a block.
tldr
Proof of burn works like virtual mining: You buy a virtual mining rig if you burn coins. The more coins you burn, the more powerful the mining rig. Every virtual mining rig gives you the right to mine for a long time, just like real mining rigs. But they eventually lose their power – just like mining rigs that get obsolete because of Moore’s law.
Coins that use PoB
XCP(Counterparty) and Slimcoin are among the many that have used proof of burn to transfer value from one token to another.
