What is Proof-of-Burn (PoB) in blockchain?
Proof-of-Burn (POB) is a type of consensus algorithm that is used in some cryptocurrencies. In this system, miners show “proof of work” by burning (or destroying) some of their coins. The more coins a miner burns, the more “proof” they have, and the more likely they are to be chosen to validate a block of transactions. POB is seen as a more environmentally friendly alternative to Proof-of-Work (POW), as it doesn’t require large amounts of energy to run the mining process. However, POB is also considered to be less secure than POW, as it is easier for an attacker to buy up a large amount of the currency and then burn it all at once in order to take control of the network.
Does Proof-of-Stake Burn Coins?
No, Proof-of-Stake (PoS) does not burn coins. Instead, it uses a validator’s existing stake in the network to determine their right to block creation and/or transaction validation. The more coins a validator has staked, the more “weight” they have, and the greater their chance of being chosen to validate a block or transaction. This process of staking one’s coins is what gives PoS its name. In the strict sense, POB does not permanently destroy coins. They are only transferred to a stipulated account. The tokens are visible to the public but become unusable. The net effect is to take the tokens out of circulation. This method creates scarcity that is good for inflation.
What Is Proof-of-Stake And Proof-of-Burn?
The key difference between proof-of-stake and proof-of-burn is that proof-of-stake rewards the validators for their stake in the network whereas the proof-of-burn gifts miners for burning the coins. Proof-of-stake uses an algorithm to achieve distributed consensus. It is an energy-efficient alternative to PoW. Under this system, the validators are chosen based on their stake in the network and receive rewards for validating the blocks. If they validate a fraudulent block, they lose their stake via slashing. Under Proof-of-burn, miners are rewarded for burning the coins and validating blocks. The “burn” part comes from the fact that the currency is destroyed in the process. Both are significantly more efficient than POW.
Which Cryptocurrencies Use Proof-of-Burn?
Notable cryptocurrencies using POB are Slimcoin (SLM), Counterparty (XCP), and Factom (FCT). Some coins use a combination of POS and POB for token issuance and maintenance.
Does Coin Burn Increase Prices?
Proof-of-Burn is a gradual management process. The price effect is long-term as the burns have only limited effect in the short term. Nonetheless, investors can use news of planned coin burns to purchase a token and affect its price somewhat. That said, it is more of a management strategy with burns being already priced into the token roadmap.
Did Bitcoin Ever Burn?
No, Bitcoin has never “burned” any coins. All of the coins that have ever been mined are still in existence today. There are a finite number of BTC that will ever be created, so once all of them have been mined, that’s it. There is no mechanism for burning Bitcoin. However, it had a limited number of tokens, to begin with, hence invalidating the need for coin burns. There are only 21 million BTC, far below the billions that are standard for subsequent cryptocurrencies.