2 August 2023
Blockchains using Proof of Stake operate according to a distinct consensus algorithm. The PoS algorithm uses digital signatures to demonstrate coin ownership in place of hash functions. The so-called block forgers or minters, who are selected in a deterministic manner, validate new blocks. The likelihood of a forger being selected as a block validator increases with the number of coins at stake. However, unlike PoW systems, the bulk of PoS systems do not offer block rewards; instead, a minter only receives transaction fees in exchange for verifying a block.
Despite having similarities to PoW and PoS, the Proof of Burn algorithm has its own unique method for achieving consensus and validating blocks.
There are other variations of PoB, but Iain Stewart's idealized form is perhaps the most well-known in the cryptocurrency world. It was suggested as a more environmentally friendly substitute for the PoW consensus algorithm.
To put it another way, users can "mine" and authenticate transactions by committing coin burns to prove their dedication to the network. The more coins a user burns in support of the system, the more mining power he/she has, and the greater the likelihood that they will be selected as the next block validator. This is because burning coins symbolizes virtual mining power.
The fact that miners must expend a lot of resources before being profitable is one of the reasons Proof of Work blockchains are safe. As a result, a PoW miner will have every reason to perform honorably and support the network to avoid having their first investments wasted.
Similar thinking underlies Proof of Burn algorithms. However, PoB blockchains are only designed to be protected by the investment made through coin burns, not by investing in electricity, labor, or computing power.
In a manner similar to PoW blockchains, PoB systems would award block rewards to miners, and over time, it is anticipated that these rewards will equal the initial investment made with the burned coins.
The fact that the block validators must invest their coins in order to take part in the consensus mechanism unites PoB and PoS. PoS blockchains, on the other hand, demand that forgers stake their coins, typically locking them up. But if users choose to quit the network, they are free to return those coins and resell them. Because coins are only removed from circulation for a short while, there is no ongoing market scarcity in such a situation. On the other hand, PoB block validators are forced to permanently destroy their coins, resulting in an ongoing economic shortage.
The benefits and drawbacks described here are based on the typical justifications offered by PoB backers and shouldn't be taken as facts. These arguments are controversial, thus it will take more research to determine if they are reliable or not.
Some claim that PoB is not really environmentally benign because PoW mining, which uses a lot of energy, creates the coins that are burned. On a bigger scale, it is not proven to work. It has to be tested further to confirm its security and effectiveness. Verification of the miners' work frequently takes longer than expected. It moves more slowly than in blockchains with proof of work. Coin burning is not always visible or simple for the common user to verify.