Proof-of-Burn is a consensus algorithm that uses coin burning to create value. This guide will explore what Proof of Burn is, how it works.
Proof of Burn (PoB) is a method of securing crypto-currency networks through the destruction of coins. To create a new block and receive the associated rewards, a miner must submit a Proof-of-Burn transaction. This transaction sends a number of coins to an address that will never be used again. These coins are then destroyed or “burned”.
The Proof of Burn is a real investment to become a miner. You cannot create a new block by burning random coins. To participate in the network, you must sacrifice something of value. This ensures that only serious players are involved and guarantees the stability of the network.
Proof of burn, how does it work?
Proof of Burn was first implemented by CounterParty (XCP) in January 2014 to help secure their blockchain. Here’s how it works: XCP had 663 total coins before implementing Proof of Burn. After that, there were still 663 coins in circulation, but no new coins would ever be created. Blocks were mined at two-minute intervals, with each block awarding five new coins to the miner who found it. Since this was done in addition to Bitcoin (BTC), XCP miners also received all transaction fees for each exchange made on the CounterParty platform.
There are key differences between traditional Proof of Work (PoW) mining and Proof of Burn (PoB) mining. In the case of PoW, the number of coins a miner can create is unlimited. As long as he has enough computing power, he can continue to create new blocks and earn rewards. With the Proof-of-Burn method, the number of coins in circulation is fixed. This means that there is a limited amount of rewards available to miners, which prevents inflation.
Another key difference is that the mining process is much slower with the Proof-of-Burn method. To create a new block, you must first find an unused address and submit a proof-of-burn transaction.
This is how it works. Newly mined coins will be placed in an unusable address for 512 blocks and become spendable again. The spending process requires sending a special type of transaction called the OP_RETURN transaction which includes the hash of the block header. Once the transaction is sent, some coins will be automatically burned, and a new block will be created.
After the success of their initial coin offering (ICO), they implemented a Proof of Burn method where approved users could burn their own PTS tokens in exchange for a certain amount of Counterparty (XCP). This method distributed the XCP fairly among everyone who wanted them at the time.
Burning your coins makes them scarce, which usually drives up the price. Also, if you want to participate in the ICO of a new Proof-of-Stake token, burning a few BTC or altcoins will likely increase demand while reducing supply. This phenomenon is widely known as the bootstrapping effect.