Crypto Academy Week 13 - Homework Post for @alphafx | Blockchain Consensus Algorithms: Proof of Burn

Have you ever wondered how Bitcoin, Ethereum, Tron and Steem blockchains are able to run effectively and securely?

Over two decades back, two scientist came together to form what we currently know as “Proof of Work (PoW).” That was just the beginning. A decade later, an alternative was created – the “Proof of Stake (PoS).” It was created because the Proof of Work required too much electricity to function.

Those are two powerful blockchain consensus algorithms that helps many blockchain networks today. While the Bitcoin network uses Proof of Work, the Ethereum blockchain use the Proof of Stake algorithm. While our lovely Steem blockchain use the Delegated Proof of Stake (DPOS). DPOS was invented by Dan Larimer, former CTO and co-founder of Steemit Inc.

Today, we’ll be looking at another blockchain consensus algorithm – the Proof of Burn model in detail.

But first, let’s talk about the concept “Blockchain Consensus Algorithm.”

What is Blockchain Consensus Algorithm?

This is the process by which a blockchain network reaches a consensus or a standard acceptance. The consensus makes it possible for the chain to reach a high level of security and trust between several nodes by the verification and validation of transactions. Hence, it brings reliability to the network.

Another way to look at blockchain consensus algorithm is that it is what powers everything in the blockchain ecosystem.

Proof of Burn	Proof of Work	Proof of Stake
Block rewards when tokens are burned	Block rewards when tokens are mined	Transacation fees when tokens are staked

What is Proof of Burn?

The concept of Proof of Burn was initiated by Iain Stewart, one popular name in the blockchain ecosystem. The concept was created to serve as an alternative to the other blockchain consensus algorithms that are in existence.

While similar to the PoW in some ways, it has it is more sustainable. Let’s say you reduce the energy rate of consumption that was in the PoW system, what you get is the first version of the Proof of Burn system. That is because the PoB is not reliant on massive computational power and high-power mining machines.

In the Proof of Burn system, cryptocurrencies are burned with the use of virtual mining. This helps to add resources to the blockchain without investing in high-power mining. In simple terms, users can mine and validate transactions on the network by burning the tokens. The more burns a user of the blockchain makes, the more mining power that is exerted.

How does the Proof of Burn model work?

When users want to burn tokens, all they simply have to do is to send tokens to an address on the blockchain that is publicly and easily verifiable. This kind of addresses do not have any private keys, so the tokens are inaccessible by anyone, even the developers.

For example, on the steem blockchain in order to burn tokens, the tokens are sent to @null. When tokens are sent to that address, the sender is unable to access the token and the developers of the blockchain are unable to access the tokens as well.

Generally, when burning occurs, it helps to reduce the tokens that are in circulation and that tends to increase the value of the existing tokens. In basic economics, we learn that scarcity increase value, and that is what occurs. On the security aspect, it also makes the chain more secure. That is because more is invested to the security.

Proof of Burn	Other Consensus
Burning makes the chain more secure	Invest resources (labour, electricity, etc) to make the chain more secure

Some blockchain perform this consensus by burning Bitcoin, while others do this by burning their own tokens. For example, in the steem blockchain, steem is being burned.

Proof of Burn	Proof of Stake
Block validators destroy coins permanently	Block validators stake their coins

While in Proof of Burn the tokens are burned permanently, in other consensus like Proof of stake they tokens are only staked. Hence, the block validators can simply unstake their tokens when leaving their network and sell on an exchange. Whereas in Proof of Burn, the tins s are destroyed forever. And that creates a scarcity.

Advantages and Disadvantages of Proof of Burn Blockchain Consensus Algorithm

These are possible advantages and disadvantages that can occur in the import of the Proof of Burn consensus. While it tends to differ from blockchain to blockchain, these concepts are needed to determine its suitability.

Pros

• The energy required in Proof of Burn is is quite infinitesimal compared to the computation power required by other consensus algorithms. Hence, it utilises a more suitable energy consumption.

• High-power machines are not required in order to carry out the process of burning. So this is a process that is not done physically, but virtually.

• Block validators are invested in the blockchain by burning their own tokens, hence they are more commuted, honest and determined not to cause loses on the network.

• The protocol can be used to increase the value of tokens.

• It also improves the decentralisation of the ownership of the coins.

Cons

• Verification of work done is probably slower compared to most Proof of Work models.

• When Bitcoin is burned by the blockchain network, the burning uses high-power processes.

• The process may not be easily verifiable on some networks.

• Reason for the Creation of Proof of Burn Model

• Many users really liked the Proof of Work model, but they wanted a model that was less expensive and more environmental friendly. Hence, this model was born out of such desire. With a higher efficiency, it started garnering attention.

Cryptocurrencies that use the Proof of Burn Consensus

While the steem blockchain use the Proof of Burn consensus along with its Delegated Proof of Stake model, there are other cryptocurrencies that also make use of the PoB model. There’s Factom, Counterparty and Slimcoin that also make use of this consensus.

Majority of these cryptocurrencies use the Proof of Burn model as a method for digital mining. For example, Factom uses the Burn and Mint process to create new tokens into its ecosystem. While Counterparty utilise the model in its token creation. In order to get its token, users have to send Bitcoin to an eater address.

On the other hand, Slimcoin combines Proof of Burn with Proof of Stake and Proof of Work in its token creation and burning processes.

Objectives of the Proof of Burn Model

• Decentralisation

One goal of the Proof of Burn model is decentralisation. Hence, users can trust one another without having a central authority that controls and validates transactions on the network. Hence, the data is accurate and there is trust between the parties involved.

• Rewards

The Proof of Burn model also give block rewards to the block validators. While they get rewards, they are also equally invested on the blockchain because they had to burn their own tokens to be committed to the network. Nevertheless, the incentives by network serves as encouragement.

• Fair & Verifiable

The network is fair and the burning process is easily verifiable on the blockchain. Users can look up the eater address on an address explorer to confirm tokens that have been send to the address. This way it shows that the network is open source and is committed to ensuring honesty.

• Double Spending

Double spending is not possible on the network. This is because tokens that are sent to an eater address can not be spent for another purpose. The public ledger only shows transactions that are already verified, while also showing their status. So it solves the problem of spending the cryptocurrency more than once.

Conclusion

While Proof of Work, Proof of Stake and the Delegated Proof of Stake used on Steem are very popular, the Proof of Burn model is more environmental friendly. Minters have to burn tokens in order to get more blocks. In order to burn tokens, they are sent to an address that is easily verifiable on the blockchain, which is often referred to as an eater address. This eater address does not have a private key and is inaccessible.

There are several blockchain projects that utilise the Proof of Burn model. While some projects burn Bitcoin while minting new tokens, others burn their own coin to mint new ones.

We also looked briefly at what the consensus protocol entails. How it governs the blockchain environment to ensure everything is in order and prevents challenges that traditional networks may have.

Thanks to @alphafx for this week’s interesting assignment.