The magic of Proof of Burn

d5000 edited this page Jun 28, 2017 · 3 revisions

Proof of burn has multiple advantages over both Proof of Work and Proof of Stake and some very interesting economic implications.

Advantages over Proof of Work:

  • Very low energy consumption
  • No need to invest in powerful hardware
  • Lesser artificial price swings because of the "mining hardware" investment cycle or the influence of multipools

Advantages over Proof of Stake (including DPoS):

  • No simple "rich get richer" mechanism. Proof of burn rewards entrepreneurial risk, not wealth.
  • While "staking" coins can be stolen hacking the private key, burnt coins cannot be "stolen" that easily. When an attacker hacks a wallet he could get the PoB rewards, but incentive for this kind of attack is low as the attacker would have to wait a long time until (s)he gets a significant amount of coins - in this long period the legitimate owner of the key can track him. Apart from that, it depends on luck if he can transfer the received coins to another address because the legitimate owner will still have the key and can be faster than the attacker.

The economic model

Proof of Burn has at least four very interesting economic implications that can lead to a more stable ecosystem and even a more stable price with less pump-and-dump bubbles.

  • It rewards long-term investments: When you burn coins, you basically trade a short-term loss to a mid/long-term advantage. You will very probably get back your investment via the PoB reward mechanism (and probably even more), but you won't get it back immediately but after a certain amount of time. That means that the risk to make a long-term investment is rewarded directly by the PoB mechanism. Short term Pump and dump scenarios are obviously possible, but long-term involvement is explicitly made more profitable than in other cryptocurrencies. A high long term investor/short term investor rate should stabilize the price.
  • Stable node count because of the long minting incentive: The probability for profits for the Proof of Burn minters increases if they are online 24/7 and mint for a long time. As for more than a year a profit can be expected due to the slow decaying of the "burn score", there is also an incentive to continue minting even if the price is low. In 2016 there was a long period where Slimcoin was delisted from all exchanges - it probably survived thanks to the Proof of Burn incentive.
  • Burnt coins are locked forever and can't be sold: After you burn coins, you cannot spend them anymore. So you can't sell them in a panic event and very probably there will be less sellers in a price crash. For this reason the participants in the Proof-of-burn mechanism can be seen as "backers" of the coin price, as the burnt coins are not part of the available supply.
  • It is "easier" to burn coins when they are cheap. When price is low but fundamentals are sound, then the burn rate should be higher than in the times when coins are expensive, simply because it's cheaper to burn coins. Every coin burnt is rested from total supply. So supply tends to be smaller, the lower the price is - and that is a excellent condition to make the price rise again. That means that PoB probably has an inherent supply-follows-demand mechanism - something very difficult to implement as a separate "supply-regulating" algorithm.
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