CRYPTOACADEMY HOMEWORK TASK: PROOF OF BURN// #CONSENSUSALGORITHM//#ALPHAFX-S2WEEK//15/5/2021//@mobibliss5BURN//

in #cyptoacademy3 years ago (edited)

I will begin by commending our able professor @alphafx on his lecture on consensus algorithm. Truth be told, it is indeed my first time to here of it and I am glad to understand how coins are mined. The homework task is to write on any of the consensus algorithm and here I want to write on proof of burn.

PROOF OF BURN CONSENSUS ALGORITHM
Already, we understood what consensus algorithm is from the lecture. But for the benefit of our assignment, let me explain in a layman's understanding.
In fiat currency, usually in centralised finance, control of the currency is done by one central authority that is recognised by every one. For instance a central bank of a country is responsible for currency control, they determine when a currency needs to be added or minted and they are recognised as having such power. Everyone accepts what comes from them as truth.
In decentralised finance, like in crypto currency, things are different. There are no central authority. When a transaction is done in a blockchain every node or everyone has a copy of such transaction. Now the question waiting for solution is: how can a currency be added and who should? How do we know that the person minting the coin is not cheating? How do the coins get it's value ? The truth is, there must be a channel that is accepted by everyone as a source of truth. Therefore to tackle the arising issues a standared has to be set (by the owners of the crypto project) which is accepted by everyone over a criterion to be met by a minter or a validator before his work is added to the chain. If those criterion are not met, the system will reject it. In this way everyone has reached a consensus or agreement that the transaction is valid.
The validator or minter will still need to provide proof that he has followed all due processes and the proof will be verifiable. Hence, proof of.

PROOF OF BURN

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There are many different consensus algorithm like: proof of work ( pow), proof of stake( pos), but here we want to discuss proof of burn.
what is proof of burn?
This is a process in which coins are burned and the general purpose is to create scarcity and add value to the project.
I know that explanation may seem vague. Let's therefore understand the burning concept.

HOW COINS ARE BURNED

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In proof of work (pow) consensus algorithm for instance, to mint a new coin and add value to the crypto project, let's say bitcoin for example will require a lot of computational skill, high costly and very fast equipments. The minter or miner or group of will need to compete with other miners too. Though rigorous processes are required, the first to solve the computational problem gets credit and his work will be added to the chain. He will be rewarded with bitcoins for the work he has done. To arrive at this point he has given proof of work. As you can see the process is costly and involves high energy consumption.
In proof of stake ( POS). A stakeholder will hold his coin, storing it away for a period of time so that it will not be in circulation. This is done to create scarcity and the stakeholder will be rewarded for his investment, according to the value of coin stored away. He is free to sell his coin when he want to exit the project.
Moreover in proof of burn, just like the proof of stake, instead of holding and storing away the coin so that it will not be in circulation, the miner destroys his coin completely. He does so by sending the coin to what is called the "eater addresses"
"Eater address" are crypto addresses with public keys but with no private keys making any coin sent to the address inaccessible. Once a coin is sent to the address they are burned or eliminated completely and forever from circulation. Therefore when a coin is burned it is visible given proof thereof of the burning and the miner will be rewarded for destroying his own coin.

PURPOSE OF PROOF OF BURN
1:) The general purpose is to create scarcity. We know that once an item is more available, it holds little value. But when the demand is greater than the supply, the more value the item holds. When a certain amount of crytos are eliminated from circulation, it creates scarcity and the value of the asset will go high.
2:) It is used to validate transaction. Certain crypto project like the SRP charges very little transaction fees. however, instead of the money going to miners, they are burned. Removing small fractions as a way to validate transaction creates scarcity and adds value to the crypto.
3:) It saves energy consumption. Just like in proof work (pow)which require burning electricity, high computational skill, costly equipment. Proof of burn is built to eliminate those problems.

HOW PROOF OF WORK MIGHT BE BETTER
When compared to proof of work(POW) prof of burn (POB) consensus algorithm seems better. A miner in proof of work invests money on equipments and on energy, whereas in proof of burn the miner spends money on virtual currency which he will burn for rewards.
In proof of stake a holder stores away coin that he can later use, which in other words it may seem a fake scarcity, but in proof of burn the investor eliminates the coin completely adding true value.
CONCLUSION
Coins are burned when they are eliminated completely. The benefits includes creating scarcity and saving energy consumption cost

@trafalgar
@alphafx

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Please professor @alphafx, rate my work

would have liked you to mention projects using the P.O.B algorithm.

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Thanks for participating

Noted, thanks

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