What is Proof of Burn and what purpose does it serve for crypto
Proof-of-Burn is one of the oldest consensus mechanisms that didn’t get adopted as widely as PoW and PoS. This guide will help you learn its ins and outs.
What is Proof of Burn and what purpose does it serve for crypto
Proof-of-Burn (PoB) is one of the lesser-known consensus mechanisms in the crypto landscape. Its uses are as varied as the more conventional ones like Proof-of-Work (PoW) or Proof of Stake (PoS) but it handles digital assets differently. Though it is used less often, it’s still a reliable mechanism with various benefits to the average crypto investor.
Understanding PoB is as simple as learning about PoW and PoS. It’s an algorithm that provides a network’s automated decision-making in handling assets as well as rewarding users. Gamdom gives you everything you need to know about it from how it works to how you can benefit from it:
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Basics of a consensus mechanism and its role in the blockchain
Consensus mechanisms are programs that allow blockchain systems to operate autonomously. It is the key to how crypto networks can work independent from any company or organisation, thus maintaining a decentralised structure. This type of program comes in various forms and each one has its own strengths that are vital in their system’s respective role in the economy.
How Proof-of-Burn (PoB) works as a consensus mechanism
Proof-of-Burn works just as any consensus mechanism is expected to. They allow transactions of cryptocurrency between users who will pay transaction fees to pay validators. However, validators are selected randomly among miners. Their odds of being chosen are dependent on how much they’ve burned in the network.
Burning crypto to participate in the network can be both done actively and passively. You have to actively burn crypto if you want to join as a miner in the system and do it again to increase your chances of being selected as a validator. It is also passively done because only a cut of the transaction fee is paid to you as a reward. The rest are burned with credits to you as a miner.
Difference of PoB from PoW and PoS
The best way to better understand PoB is to compare it with its more popular contemporaries, PoW and PoS. PoW is credited as the first census mechanism that introduced crypto to the world through its most popular examples, Bitcoin (BTC) and Dogecoin (DOGE). PoS is meant to be its more scalable replacement and is primarily used by Ethereum (ETH) and Cardano (ADA).
Both consensus mechanisms get their hashrate power as provided by miners just like PoB. However, they track how they pay their miners differently.
| PoB | It chooses a validator among miners based on how much cryptocurrencies they’ve burned. |
| PoW | It gives the assignment to validate a transaction to every miner simultaneously. However, only the first mining rig to solve it is granted the credit and reward from that transaction. |
| PoS | Users must lock a minimum amount of crypto as a stake in a node which the consensus mechanism will randomly choose as the validator of a transaction. The more nodes that the miner owns, the higher the chance that they will be chosen. |
Networks using the PoB consensus mechanism
There have been many crypto networks that use Proof-of-burn in blockchain but they’re not as popular as the likes of Bitcoin and Ethereum. Here are some of those examples that have gained a wide enough popularity that they have a secure market capitalisation. Therefore, they are great platforms to invest:
Counterparty
It is a crunchbase company based in the United States that founded a decentralised exchange of the same name. This platform was built on the Bitcoin network and it’s for unique digital assets which are now known as Non-Fungible Tokens (NFTs). However, Counterparty was the first to make this type of exchange happen when it launched in 2014.
Counterparty used Proof-of-Burn to fund its system instead of the traditional means like crowd sales or initial coin offerings (ICOs). Users must first exchange any digital asset to its native XCP token then burn by buying a virtual mining rig. This asset allows users to mine blocks on the Counterparty network.
Slimcoin
Another company that was founded in 2014 was Slimcoin which proposed an energy-efficient network compared to most altcoins at the time. Its native SLM token can be exchanged in FreiExchange, an exchange platform for many supported altcoins including its own FreiCoin (FRC).
Unlike most cryptocurrencies, Slimcoin can be mined through all three consensus mechanisms: PoW, PoS, and PoB. Therefore, you can set up a mining rig to provide the network’s hashrate, stake in nodes, or burn SLM to invest in the blockchain. Slimcoin doesn’t have an official development team so it’s a community-run project where you can vote for its future.
Factom
Just like the other two networks, Factom was founded in 2014 but its visions have aged well. It’s an enterprise-grade blockchain layer serving as a cross-chain solution for independent nodes to communicate with Bitcoin. Factom is now used in various industries as a record-keeping platform so users can keep important files without needing extensive documentation.
There are two native tokens to Factom and those are Factoid (FCT) and Entry Credits (EC). FCT is traded in marketplaces just like any altcoin and you can earn it as a reward in the system every month. However, its main use is to be burned in the network when you buy ECs. This crypto is used as a utility and democracy token in Factom.
Benefits and challenges of PoB
The pros and cons of PoB are easiest to understand when it’s compared with other networks. Its consensus systems are conceptually similar to PoW and PoS and all mechanisms are designed to expand the crypto economy. Here are the benefits of Proof-of-Burn crypto and challenges explored:
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Benefits of PoB as a consensus mechanism
The benefits of PoB were solutions to the problems posed by older versions of PoW. These still hold up as valuable assets today, especially in the ever-growing landscape of the crypto economy.
- Higher scalability and energy efficiency than PoW
PoB crypto was created as an alternative to PoW because the latter was not designed to support an ever-growing number of users. Thus, mining becomes a lot more energy-consuming as more miners join the blockchains of Bitcoin and its forks like Litecoin (LTC). PoB offers earning without the need for powerful mining hardware while also supporting more people.
- Burning crypto regulates inflation
The state of the cryptocurrency market is in the hands of the users. This is because everyone has full autonomy on when to burn crypto to invest in the network. It raises their chances of being chosen as validators and lowers the supply of circulating cryptocurrencies in the network.
- Rewards long-term commitment from miners
The most exciting part of the PoB crypto is how it rewards users who have stayed with the network longer. New miners will always join the network and that would increase the rewards you can get as passive income. You can also burn this to be selected more often as a validator, allowing you to snowball your income the longer you stay as a miner.
Challenges of PoB in the crypto economy
The challenges found in using PoB are mostly from its limitations as a community-driven consensus mechanism. Without a company managing its networks, it tends to have the following cons:
- Lower number of users than PoW and PoS crypto
The number of users is vital to the growth of any blockchain. Having more miners means that the processing speed is faster and that the local assets are more valuable. Unfortunately, platforms like Counterparty, Slimcoin, and Factom are not as widely adopted as PoW or PoS. Therefore, liquidation is limited within their respective niche.
- Burning of coins is not transparent to users
The burning happens by users sending cryptocurrencies to an ‘eater address’, a wallet address that nobody has access to. That means the asset still exists but disconnected from circulation, rendering them useless. However, there is no monitoring for this process. Thus, there are security concerns over whether that wallet is actually inaccessible or not.
- Verification tends to be slower than PoW and PoS
PoB was designed to scale up with a higher number of users but it couldn’t get that into practice. Thus, there are delays happening when validating transactions that can take longer than some PoW crypto which was supposed to be an upgrade. PoS is still the overall better consensus mechanism in this regard.
Proof-of-Burn is useful but flawed as a consensus mechanism
The reason why PoB crypto is not well known is because PoW and PoS are just generally better in many ways. That’s why it doesn’t have any network that gained an appeal as massive as Bitcoin and Ethereum have.
Regardless of this, PoB networks are still being supported today with functions aiding in the expansion of the crypto industry worldwide. There will come a time when you’ll see a Proof-of-Burn crypto being popular in markets. When that happens, there will be more liquidity for your Gamdom winnings.
FAQ
Proof-of-Burn is one of many niche mechanisms in the crypto industry and that’s why not too many people have heard of it. Here are some of the most commonly asked questions about it that all investors should know:
What is PoB?
Proof-of-Burn or PoB is a consensus mechanism designed as an alternative to Bitcoin’s Proof-of-Work (PoW). Its most distinct feature is how miners invest in the network by burning cryptocurrencies so they can become validators on the network.
Is PoB a good consensus mechanism?
As of 2023, PoB is greatly overshadowed by PoW and PoS blockchains. It still has many great uses for modern investors but its blockchains are not as scalable as Bitcoin and Ethereum currently are.
Which blockchain networks use PoB?
There have been many blockchain powered by PoB. The most notable of them all are Counterpart, Slimcoin, and Factom. Each one helped Bitcoin expand its ecosystem in 2014 and onwards.
