Crypto Academy Season 2: Week 5 – Consensus Algorithms – by @alphafx

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Hi everyone, In this homework week 4 task post, I will be answering this week’s task on Consensus Algorithms, a task by @alphafx - I will be giving my opinion and writing about one of the types of consensus algorithm – the poof of burn consensus algorithm. When it comes to investing in cryptocurrencies, it is very important to understand and have an in-depth knowledge of the blockchain project as part of the fundamental analysis as it goes a long way when it comes to making the right investment decision.

Proof of Burn and What it is all About

Consensus algorithm or mechanism has remained one of the major aspects of any blockchain network as it is what is used to reach consensus, create new block, validate block on the blockchain network. We all know that Bitcoin holds the status as the first blockchain and cryptocurrency to be created and it consensus algorithm was the proof of work where miners make use of expensive and high computation mining rigs in order to compete against other miners to solve the complex mathematical problems and add new block to the blockchain network. This process became more and more problematic as mining rigs became more and more scarce and expensive. While miners make a lot from mining due to the value of bitcoin, it is also important to know that the process to become a successful bitcoin miner isn’t an easy one and require a lot of investment on the expensive mining rigs and sometimes, it is not even guaranteed that a new miner would recover the cost of setting up a mining rig for bitcoin.

Proof of burn consensus algorithm is simply a type of consensus algorithm that has to do with miners burning coins to unrecoverable and irretrievable addresses that has been randomly generated and doesn’t have any private keys attached to them. Proof of burn was created to be an alternative to the already proven and popular proof of work and proof of stake. One thing that makes proof of burn stand out aside from the fact that it is the only consensus algorithm that burns coins to reach consensus, it also has a connection with proof of work because it burns coins that has been mined by proof of work mechanism.

How does proof of burn work?

When it comes to proof of burn, there isn’t only one version of it, in fact, there are various versions of the proof of work consensus mechanism or algorithm. Basically, the proof of burn works by miners burning coins to verifiable addresses that doesn’t have any private keys attached to them – which simply makes those addresses unrecoverable and the coins irretrievable, meaning that those coins sent to those addresses are burnt or gone forever, removing them out of circulation.

While there are some similarities between proof of burn and proof of work, the proof of burn consensus algorithm is very much different in its own way… proof of burn uses what is known as virtual mining rigs instead of the physical mining rigs which proof of work uses. When miners burn coins to these unrecoverable addresses that doesn’t have any private keys attached to them, they show their commitment and gain rights to mine and validate transactions on the network. Simply put, the more coins a miner burns, the more mining power the miner gets and the more mining power, the higher the chances that the miner will be chosen to validate the next block.

Main benefit of proof of burn consensus algorithm

As expected, each of the available consensus algorithms have their own benefits and reasons why they were created. The proof of burn also has its own blockchain hence it wouldn’t be considered as an interesting consensus mechanism concept. The main benefit that proof of burn provides it in the aspect of value. When coins are burnt, they are taken out of circulation, meaning that those coins are destroyed forever and cannot be available to be sold in the market which as we all know, the more coins are in supply, the higher the chances of price dropping due to dump in the market. With proof of burn, each of the coins burnt are destroyed forever which means that there is a greater chance of the price of the coins to go up in value due to fewer coins in circulation.

Advantages and Disadvantages of Proof of Burn

Advantages	Disadvantages
In proof of burn, coins are burnt and are destroyed forever	The burnt coins might not be transparent for users that doesn't have technical knowledge
Consensus is reached by miner burning coins and there is a very low chance of centralization because compared to other consensus types like proof of stake that is dependent on the amount of coins held	This consensus mechanism has yet been proven to be a really effective way to reach consensus ..............................................
It uses virtual mining rigs which makes it more sustainable because miners are do not have to spend too much on the very expensive mining rigs	Even though this mechanism uses virtual mining rigs, it still requires the mined coins of proof of work to be burnt.
Higher chances of price increase in value due the burnt coins taken out of circulation	There is no guarantee that the price of the coins will increase because in crypto anything can happen and is highly volatile
By making use of virtual mining rigs, it reduces power consumption	This consensus algorithm type is not proven to be efficient and secure.

Conclusion

In my opinion, proof of burn is a very interesting concept that I think will have a lot of value. We’ve seen the downsides of proof of work and how difficult it is for anyone to become a miner of most proof of work blockchains. Then came proof of stake which tried to make things a bit more balanced, giving anyone a chance to become a validator, however, proof of stake has shown to have its own downsides especially in the area of increased chances of centralization. With the proof of burn, it makes it more appealing to anyone to become a miner and also increases that chances of the coin to have more value because of the burning which takes the burnt coins out of circulation.