Blockchain is the backbone technology of digital cryptocurrency Bitcoin that allows digital information to be decentralized and distributed. It provides immutability, privacy, security, and transparency. In Blockchain no central authority is present to validate and verify the transactions, yet every transaction in the Blockchain is completely secured and verified. The transactions are considered to be secured and verified because of the consensus protocol which is a core part of any Blockchain network.
Consensus Algorithm: A consensus algorithm is an algorithm or we can say a procedure through which all the peers of the Blockchain network reach a common agreement about the present state of the distributed ledger. In this way, consensus algorithms help to achieve reliability in the Blockchain network and establish trust between unknown peers in a distributed computing environment. It makes sure that every new block that is added to the Blockchain is the one and only version of the truth that is agreed upon by all the nodes in the Blockchain.
Proof of Work (PoW): Bitcoin uses a PoW consensus algorithm. This algorithm is used to select a miner for the next block generation. The idea behind this algorithm is to solve a complex mathematical puzzle that requires a lot of computational power and easily gives out a solution. Thus, the node that solves the mathematical puzzle as soon as possible gets to mine the next block.
Proof of Burn (PoB): With PoB, instead of investing in expensive hardware equipment, the validators follow the following approach:
- They burn coins by sending them to an address from where they are irretrievable.
- By committing the coins to an unreachable address, validators earn a privilege to mine on the system based on a random selection process.
- Thus, burning coins means that validators have a long-term commitment in exchange for their short-term loss.
- Depending on how the PoB is implemented, miners may burn the native currency of the Blockchain application or the currency of an alternative chain, such as bitcoin.
- The more coins validators burn, the better are their chances of being selected to mine the next block.
While PoB is an interesting alternative to PoW, the protocol still wastes resources needlessly. It is also questioned that mining power simply goes to those who are willing to burn more money.
Why Proof of Burn Required?
There were some drawbacks in the PoW consensus algorithm which made researchers work towards a new consensus algorithm i.e PoB.
- The first drawback is that the power consumption of PoW is very high. Miners are awarded by upgrading the ledger under a POW model. Computational power is employed to solve a math problem in exchange for remuneration. Greater the money a miner spends to solve the problem, the greater the chances that they will be allowed to mine blocks.
- PoW requires very high capital investments.
How PoB Works?
- As the name itself suggests, there is something which should be burned. Here as we are talking in the context of virtual currency so it’s obvious that in PoB virtual currency is burned. The more the currencies are burned by miners the more they have the power to create blocks.
- By burning we don’t exactly mean burning. It means not using that coin. This may be done if it is sent to somewhere where it can’t be spent. So miners send these coins to such addresses from where they can’t be used. It is sent to a public verifiable address where it cannot be accessed and thus can not be used.
- When the coin is burnt its availability decreases leading to a potential increase in the value of the coin.
- Now the question is why do we need to burn the coin? The basic explanation for this is that by destroying the currency, the consumer is displaying a big commitment to the currency by foregoing a narrow profit in exchange for a long-term profit.
- To avoid any undue advantages for early adopters, the PoB has devised a method that allows for the periodic burning of crypto coins in order to maintain mining capacity. Any time a fresh block is mined, the energy of burned coins decreases slightly.
- It is a deflationary idea in which the quantity of currencies reduces over time, increasing deficiency and, as a result, the currency holders’ value. Coins that grow their quantity over time, on the other hand, tend to lose value.
Proof of Stake (PoS):
Another commonly used consensus algorithm is PoS (Proof of Stake). This is the most common alternative to PoW. In this consensus algorithm, instead of investing in expensive hardware to solve a complex mathematical puzzle, the validator uses the following approach:
- They invest in the coins by locking up some of their coins as a stake.
- All the validators will start validating the blocks.
- Validators will validate blocks by placing a bet on them if they find a block that they think can be added to the chain.
- Based on the actual blocks added in the Blockchain, all the validators get a reward proportionate to their bets, and their stake increase accordingly.
- In the end, a validator is chosen based on their economic stake in the network to generate a new block.
Thus, PoS encourages validators through an incentive mechanism to reach an agreement. It doesn’t use hash functions, it uses digital signatures as the proof of ownership of the coins. Block forgers or minters are used for the validation of new blocks. The forger who puts more coins at stake has a greater chance to be selected as the block validator. There are no block rewards in the PoS system.
Advantages of PoB Over PoS: In Pos blockchain, market scarcity is not permanent. The scarcity is only for a certain amount of time i.e. until the forger stakes their coin which is usually done by locking them up. But the coins come back into circulation if the forger who is leaving takes those coin and sell them in the market. While in the case of PoB the coins are destroyed thus the scarcity is permanent.
Advantages of PoB:
- It required very little power compared to PoW.
- It reduces energy consumption by wasting insignificant resources when coins are burned.
- It encourages long-term involvement in a project as a consumer is displaying a big commitment to the currency by foregoing a narrow profit in exchange for a long-term profit.
- The coin distribution is more fair compared to all other consensuses.
Disadvantages Of PoB:
- It is risky because one doesn’t know that will they gain the wealth they have burnt in the future or not.
- As coins are burnt, so technically if we see then resources are wasted.
- It may suffer from rich getting richer phenomena. In which those who are wealthy are getting wealthier by having more coins.