Consensus algorithms have been an area of study in computer science since the early days. However, this article will discuss Proof-of-Burn blockchain consensus algorithm, which is becoming increasingly popular with developers due to lower resource requirements and higher efficiency than other types of consensus algorithms.
The “proof of burn protocol” is a consensus algorithm that allows for the blockchain to be secure and decentralized. Proof-of-burn uses an incentive scheme, where users must burn tokens before they can use them.
Through its series Inside the Blockchain Developer’s Mind, Cointelegraph is following the creation of an entirely new blockchain from conception to mainnet and beyond. Andrew Levine of Koinos Group has detailed some of the hurdles his team has experienced since identifying the primary concerns they want to address, as well as three of the “crises” that are preventing blockchain adoption: upgradeability, scalability, and governance. Part one of this series is about proof-of-work, part two is about proof-of-stake, and part three is about proof-of-burn.
I looked into proof-of-work (PoW) — the OG consensus algorithm — in the first piece in the series and discussed how it works to bootstrap decentralization but also why it is wasteful. In the second essay, I looked at proof-of-stake (PoS) and how it might help a decentralized network operate more cheaply than proof-of-work, but also why it further entrenches miners, necessitates complicated and morally dubious cutting conditions, and fails to prevent “exchange assaults.”
In this essay, I’ll describe the third consensus algorithm, which was presented around a year after proof-of-stake but has never been implemented as a consensus algorithm on a general-purpose blockchain for reasons that should be obvious. At least, such was the case until today.
From a game-theoretical standpoint, blockchains are a game in which players compete to verify transactions by arranging them into blocks that match the blocks of transactions made by other players, as I outlined in the first article. Bitcoin (BTC) operates by giving greater weight to blocks created by persons who have likely invested more money and “shown” their worth via “labor.”
These people’s punishment is simple since they’ve already been punished. They’ve already spent money on hardware and ran it to make blocks. Proof-of-stake, on the other hand, works in a fundamentally different manner, with significant game-theoretical implications.
Instead than requiring block producers to commit capital to buy and operate hardware in order to earn block rewards, proof-of-stake requires token holders to merely sacrifice their capital’s liquidity to receive block rewards. The concern is that it reduces network security since an attacker only has to stake 51 percent of the platform’s basic currency to gain control of the network.
PoS systems must install intricate algorithms meant to “slash” block rewards from user accounts to counter this attack, which adds to the network’s computational burden, raises serious ethical issues, and only works if the attacker does not have 51 percent of the token supply. Implementing these cutting conditions is far from simple, which is why many proof-of-stake projects, such as Solana, debuted with centralized solutions in place, and why others, like as Ethereum 2.0 (Eth2), are taking so long to adopt PoS. The conventional answer is to give a foundation a substantial enough stake that it can detect who is a bad actor and reduce their rewards on its own.
This is particularly troublesome in a world where centralized exchanges use custodial staking, which allows them to gain control of over 51 percent of a token supply without incurring any risks, lowering the cost of an assault. In reality, this has already occurred in recent history on one of the world’s most popular blockchains, Steem, which was once valued at about $2 billion.
Proof-of-stake vs. proof-of-work: What’s the Difference?
Holy Grail agreement
As I said at the conclusion of my last essay, the topic of this article is if there is a “best-of-both-worlds” solution that combines the decentralization and security of proof-of-work with the efficiency of proof-of-stake. We are pleased to announce the publication of our white paper on proof-of-burn today. We claim in that white paper that proof-of-burn is the best of both worlds option.
In 2012, a year after proof-of-stake, Iain Stewart suggested proof-of-burn as a thought experiment to contrast the differences between proof-of-work and proof-of-stake. We think he unintentionally uncovered the “holy grail” of consensus algorithms, which has since been buried in the sands of time owing to historical events. Iain Stewart put it this way:
“I thought it would be fun to come up with a challenge that is a clear, unmistakable illustration of the disparity between the two points of view.” And, certainly, there is one: cash burning!”
We have firsthand experience with exchange assaults as members of the Steem blockchain’s previous core development team. This is why mitigating this attack vector was critical, prompting blockchain architect Steve Gerbino to look into alternative consensus algorithms in the hopes of finding a solution that would provide the performance and efficiency required for a high-performance world computer while also mitigating this important attack vector.
As a consensus method, proof-of-burn is extremely simple, and its distinctive value is straightforward to comprehend. It, like proof-of-work, requires “upfront” payment of the cost of assaulting the network. Aside from the hardware necessary to manufacture blocks, no real hardware, like proof-of-stake, has to be bought and operated. The exchange attack, like proof-of-work, is prevented because the block producer has already lost money and is just attempting to recover it by keeping an accurate ledger.
To launch a 51 percent assault, the bad actor must not only get 51 percent of the token supply, but also prove that they have disposed of it by purchasing virtual mining gear. The only way to make up for that loss is to produce blocks on the winning chain. It’s a very straightforward and elegant answer to the issue. Slashing criteria are unnecessary since the block producer essentially sliced their own share from the start.
Iain Stewart suggested proof-of-burn for Bitcoin a year before Vitalik Buterin ever thought of a general-purpose blockchain. Perhaps this is why it has taken so long for people to recognize how beautifully these two things complement each other. General-purpose blockchains prioritize efficiency while permitting token economic designs without the need for maximum supply limitations, which are required in proof-of-burn implementations. Part of the issue might have been that some revolutionary ideas, like as nonfungible tokens (NFTs) and market makers, as well as solutions like upgradeable smart contracts, are immensely helpful to implementation and only arose after the proposal.
Miners of NFT
Keeping track of which accounts have burnt what amounts and when they were burned may be a computationally intensive process, which might be one of the reasons why this implementation has been avoided.
Nonfungible tokens, fortunately, present us with a strong basic that the system can employ to effectively keep track of all of this data in order to distribute block rewards to genuine block producers. The ultimate product is an NFT that not only works as a virtual miner, but can also be customized indefinitely and accurately.
Based on how they price their miner NFTs, blockchain developers may precisely restrict the accessibility of their platforms. It would be equivalent to needing the purchase of ASICs (miner equipment) in order to participate in block production if the miners were priced excessively. It would be as if everyone could mine on commodity hardware if the miners were priced cheap. But, best of all, no physical gear is necessary in any case.
Because Koinos is all about accessibility, miner NFTs will most likely be inexpensive, essentially making them the most GPU and ASIC resistant algorithm available. However, this raises the issue, “What if you choose the incorrect number?” The necessity of modular upgradeability is shown by this. All business functionality on Koinos is built as smart contract modules that can be upgraded independently without a hard fork. This implies that if the price of KOIN rose to the point where the fixed cost of miners was no longer affordable, governance could simply vote to decrease the cost, and the figure would be updated as soon as a consensus was reached.
Resistance to centralization
Fixing the price of miner NFTs is similar to creating the most GPU and ASIC-resistant algorithm conceivable, since no one can gain an advantage by purchasing specialized gear. Better still, it makes miner NFTs more uniform and hence simpler to sell (fungible) on a decentralized market, reducing block producers’ risk by allowing them to liquidate their miners at any time.
Proof-of-strength burn’s comes from the fact that we’re integrating the mining gear into the system. It’s virtual hardware, which means system designers may make it as customized as they want to improve network speed. As a result, the system may be built to guarantee that the miner will get their burn plus some more tokens – a promise that proof-of-work systems cannot provide.
This customizability also enables us to counter 51 percent assaults by structuring the system such that the payback time lengthens as the demand for miners grows.
Consider the case when someone (such as an exchange) want to take over block manufacturing. First, they’d have to burn more tokens than the rest of the group combined. Even then, they’ll have received nothing in return. To start earning back their incentives, they’ll need to start manufacturing blocks on the winning chain. Other network members would be able to observe what was going on and react properly during that period. If they believe the hostile actor is aiming to seize control of governance, they may simply buy additional miners, delaying the harmful actor’s payout until they “get in line.”
The economics of tokens
Proof-of-burn has certain unique economic characteristics that set it apart from both PoW and PoS. For example, if the pace of new token generation (also known as “inflation”) is fixed, the token economy would become deflationary at some point if too many individuals engage in block production. This is because rewards will be pulled back quicker than new tokens are generated. If required, this might enhance the network’s performance.
The presence of a large number of individuals who produce blocks may have a detrimental influence on latency. This deflationary component would help to dynamically disincentivize excessive block creation while also providing a significant economic lever, or deflation, for the ecosystem.
With this series, I wanted to provide the reader an in-depth knowledge of consensus algorithms in a manner that was still understandable and, perhaps, interesting. We’ve gone through the development of the primary consensus algorithms and what I believe will be the next step: proof-of-burn. I hope you are now able to assess various consensus implementations for yourself and draw your own opinions about what is and is not innovative.
The author’s views, ideas, and opinions are entirely his or her own, and do not necessarily reflect or represent those of Cointelegraph.
Andrew Levine is the CEO of Koinos Group, a group of industry experts working to accelerate decentralization by making blockchain technology more accessible. Koinos is their flagship product, a fee-free, indefinitely upgradeable blockchain with worldwide language compatibility.
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The “proof of stake attack vectors” is a proof-of-burn blockchain consensus that uses the concept of burning tokens to keep the network secure. The idea was developed by Vitalik Buterin and has been used in projects like EOS, Cardano, and Tron.
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