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What is proof of stake?
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What is proof of burn?
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Benefits of proof of burn
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Challenges of proof of burn
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Examples of proof of burn
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Future of proof of burn
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Here’s what else to consider
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Blockchain is a distributed ledger system that records transactions and data in a secure and transparent way. It relies on consensus mechanisms to validate and update the ledger, and to incentivize the participants to maintain the network. Two of the most common consensus mechanisms are proof of stake (PoS) and proof of burn (PoB). In this article, we will compare and contrast these two methods, and explore the benefits and challenges of implementing PoB in a public blockchain.
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- Jamie Parmenter CEO at RealNifty | Editor and Founder at Vinyl Chapters | Web3 | LinkedIn Top Voice
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- Ché Köhler Co-Founder at nichemarket
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1 What is proof of stake?
Proof of stake is a consensus mechanism that assigns the right to create new blocks and validate transactions to the holders of the native cryptocurrency of the blockchain. The more coins a user stakes, the higher their chances of being selected as a validator. Validators receive rewards in the form of transaction fees and newly minted coins. PoS aims to reduce the energy consumption and environmental impact of blockchain, as well as to increase the security and scalability of the network.
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- Jamie Parmenter CEO at RealNifty | Editor and Founder at Vinyl Chapters | Web3 | LinkedIn Top Voice
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One of the drawbacks for some blockchains using proof of stake is that it can lead to an unfair advantage to those with more staked, and therefore, seem less decentralized. This is a hot topic for discussion and, at this point in time, greater scalability, faster speeds and 'being green' are the benefits that most people see.
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- Ché Köhler Co-Founder at nichemarket
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POS is an attempt to replicate proof of work without the energy consumption, but it cannot generate the randomness, and staking since it has no physical limitations can see certain validators gain a small advantage that compounds over time, so they always remain in powerProof of stake could be used on top of a proof of work system, in a layer two, such as the Lightning Network, where users put up funds to create channels; they stake the network with liquidity and can possibly earn through it if they tap into routing traffic. Proof of stake can also be a validation model for a federated side chain that manages capital through peg ins but not an L1
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2 What is proof of burn?
Proof of burn is a consensus mechanism that requires the users to destroy or "burn" a certain amount of coins in order to participate in the network. The more coins a user burns, the higher their chances of being selected as a validator. Validators receive rewards in the form of transaction fees and newly minted coins. PoB aims to mimic the concept of proof of work (PoW), which is the original consensus mechanism of Bitcoin, but without the high energy consumption and hardware requirements.
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- Ché Köhler Co-Founder at nichemarket
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POB is another one of these tokenomics gimmicks used to try and drive up interest in an altcoin, with the idea that if more people use it, the fees burned eats into the supply, and there would be fewer tokens in circulation, but that is not a given. The amount of fees burned needs to outpace the issuance of new tokens to validators or miners, and even then, you still need to have generated additional demand for the tokens coming into circulation.It might be a simulation/proxy for proof of work by giving up funds/resources to mine/add a new block, but it's a bad substitute and doesn't ensure that the network improves its security.
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3 Benefits of proof of burn
Proof of burn has some advantages over proof of stake and proof of work. First, it reduces the risk of centralization and collusion, as the validators have to prove their commitment to the network by burning their own coins. Second, it eliminates the problem of "nothing at stake", which occurs when validators have no incentive to act honestly and can stake on multiple competing chains. Third, it creates a deflationary effect on the coin supply, as the burned coins are permanently removed from circulation.
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4 Challenges of proof of burn
Proof of burn also has some drawbacks and challenges that need to be addressed. First, it may not be sustainable in the long run, as the coin supply may eventually run out or become too scarce to support the network. Second, it may not be fair or accessible to all users, as the users with more coins have more influence and power over the network. Third, it may not be compatible with some regulatory frameworks or legal jurisdictions, as the act of burning coins may be considered as a taxable event or a waste of resources.
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5 Examples of proof of burn
Proof of burn is not a widely adopted consensus mechanism, but there are some examples of projects that use it or experiment with it. One of them is Counterparty, a platform that allows users to create and trade custom tokens on top of Bitcoin. Counterparty uses PoB to create its native token XCP, by burning Bitcoin in a one-way process. Another example is Slimcoin, a cryptocurrency that combines PoW, PoS, and PoB in a hybrid system. Slimcoin uses PoB to reward the users who burn coins in exchange for mining power.
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6 Future of proof of burn
Proof of burn is an interesting and innovative consensus mechanism that offers some benefits over the traditional methods of PoW and PoS. However, it also faces some challenges and limitations that need to be overcome or mitigated. Proof of burn may not be suitable for every blockchain or use case, but it may be a viable option for some niche or experimental projects that value security, decentralization, and deflation. Proof of burn may also evolve and improve over time, as new technologies and solutions emerge in the blockchain space.
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7 Here’s what else to consider
This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?
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