Proof of Burn (PoB)
Proof of burn (PoB) means that miners must burn a set amount of cryptocurrency in order to receive block rewards. This is done as an incentive to reduce the number of coins in circulation, and to increase the value of those remaining. PoB is also used to prevent spam attacks on networks.
PoB is necessary as a deflationary mechanism to reduce the number of coins in circulation. When there are too many coins in circulation, the value of each coin decreases. PoB helps to prevent this by incentivizing miners to burn a portion of their rewards.
How Proof of Burn (PoB) Works
PoB works by having miners send a certain amount of cryptocurrency to a designated address. Once the coins have been sent they’re burned, and can no longer be used. In return, the miner receives a block reward.
Proof of Burn (PoB) Examples
Proof of burn is a relatively new algorithm that’s still being developed. As such, there aren’t many PoB coins currently in circulation. Some of the more well-known proof-of-burn coins include BitShares, Counterparty and Slimcoin.
PoB implementation can be customized. To explain this, let's look at the last example, Slimcoin. This virtual currency (SLM) allows miners to burn their coins, which not only gives them the right to compete for the next blocks but also to receive blocks during a longer period of time.
Slimcoin actually integrates the PoB, proof of stake (PoS) and proof of work (PoW) mechanisms. The process of burning coins uses PoW. The more coins a miner burns, the more chance they have to mine, thus ensuring PoS.
Proof of Burn (PoB) Advantages and Disadvantages
One of the biggest advantages PoB offers is cost-effectiveness. Compared to other mechanisms, PoB is a lot more economical. For example, PoW requires powerful computing systems that consume a lot of energy, while PoB's hardware requirements remain low.
PoB forces miners to burn a portion of their coins to generate new blocks, which keeps security levels high.
Proof of burn has a couple of limitations as well. First, it isn’t yet widely used or understood. This means that there’s still a lot of room for improvement. Secondly, PoB can be “gamed” in that those with more resources can burn more coins, easily earning more rewards — which can also lead to increased centralization.
For more details, read up on proof of work (PoW) here.