Proof of Burn (PoB)

The foundational act in PoB is the burn transaction, where miners send coins to a verifiably unspendable address (e.g., one with no known private key). This permanently removes those coins from circulation. The act is publicly recorded on the blockchain, providing cryptographic proof of the miner's sunk cost and commitment to the network. The more coins burned, the greater the miner's chance of being selected to mine the next block.

Burned coins are converted into virtual mining power or 'burn credits.' This is a key efficiency feature: instead of expending real-world energy on computation (like Proof of Work), the energy cost is metaphorically represented by the destroyed coin value. A miner's probability of mining the next block is proportional to their accumulated burn credits. This system aims to align miner incentives with long-term network health, as their investment is tied to the cryptocurrency's success.

PoB introduces a built-in deflationary pressure on the native token's supply. By permanently removing coins from circulation, the mechanism reduces the available supply, which, assuming constant or growing demand, can create upward pressure on the token's value. This contrasts with Proof of Work and Proof of Stake, which typically involve inflationary block rewards. Notable implementations include Slimcoin, which pioneered this model.

Network security is derived from the economic sacrifice of miners. To attack the network (e.g., via a 51% attack), a malicious actor would need to burn a massive amount of currency, incurring a significant, non-recoverable financial loss. This makes attacks economically irrational, as the cost likely outweighs any potential gain. The security model is similar to Proof of Work's hardware cost but replaces physical capital (ASICs) with destroyed financial capital.

PoB can be used for fair launch and initial coin distribution. Unlike pre-mining or ICOs, anyone can participate by burning a base cryptocurrency (like Bitcoin) to earn new tokens. This method aims to create a decentralized initial distribution, as entry is permissionless and based on provable sacrifice. Counterparty (XCP) was created this way, with users burning Bitcoin to receive XCP tokens, establishing its initial ledger without a central issuer.

Some PoB systems, like the one proposed for Peercoin's 'Proof of Burn for Security' sidechains, use burning to bootstrap new chains. Users burn the mainchain token to earn mining rights on a new sidechain. This allows a new blockchain to inherit the security and value of a more established parent chain from day one, solving the bootstrapping problem for new networks by leveraging existing economic weight.

Binance uses a scheduled token burn mechanism to reduce the total supply of BNB. A percentage of quarterly profits is used to buy back and permanently destroy BNB tokens from circulation. This is a form of Proof of Burn used for:

• Deflationary supply control, increasing scarcity.
• Value accrual for remaining token holders.
• Transparent commitment to the token's economic model, though it is a centralized, off-chain decision.

Protocols like Synthetix historically used a form of Proof of Burn for managing the supply of synthetic assets (synths). To reduce the supply of a particular synth (e.g., sUSD), the protocol would destroy it from a debt pool, requiring a proportional amount of SNX collateral to be burned. This mechanism enforced economic finality and ensured the synthetic asset supply was always fully collateralized by a destroyed, verifiable asset.

PoB is vulnerable to a variant of the Nothing-at-Stake problem. Since the cost of burning tokens is a sunk cost, a miner who has already burned coins to mine one chain could theoretically use the same virtual mining power to simultaneously mine competing chains (forks) at no extra marginal cost. This reduces the economic penalty for attacking the network's consensus, unlike Proof of Work where computational power cannot be duplicated across forks.

The initial distribution of burned tokens can lead to centralization. Early adopters or entities with significant capital can burn large amounts of currency upfront, securing a disproportionately large and permanent share of the mining power. This creates a wealth-to-power feedback loop where initial wealth concentration translates into persistent control over block production, potentially leading to a mining oligopoly that undermines network decentralization.

A core criticism is that security diminishes over time as the sunk cost of the burn recedes into the past. The economic value of the destroyed coins is fixed at the time of burning. If the network's value grows significantly, the relative cost of the initial burn decreases, potentially making a 51% attack economically viable for a new, well-funded attacker. This contrasts with ongoing costs in Proof of Work (electricity) or Proof of Stake (staked assets at risk of slashing).

PoB is criticized for capital destruction inefficiency. Valuable tokens are permanently removed from circulation and provide no ongoing utility beyond the initial consensus signal. This "dead capital" represents a significant opportunity cost for the network's economy. Critics argue this is less efficient than Proof of Stake, where capital remains liquid and productive within the ecosystem (e.g., through staking rewards and DeFi).

Specific implementations introduce unique risks:

• Fake Burn Addresses: If the burn address is not verifiably unspendable, a malicious actor could control it.
• Burn Transaction Malleability: Vulnerabilities in how burn transactions are recorded could allow replay attacks or double-counting.
• Time Decay Functions: Many PoB systems use a decaying virtual mining power model. Poorly calibrated decay rates can either make security too ephemeral or entrench early miners indefinitely.

PoB is often positioned between Proof of Work (PoW) and Proof of Stake (PoS) in the security landscape.

• vs. PoW: More energy-efficient, but lacks ongoing, variable cost to attack. Security is front-loaded.
• vs. PoS: Avoids the "rich get richer" compounding of staking rewards, but suffers from the "wealth-to-power" initial allocation problem and lacks slashing penalties for misbehavior. Its security is heavily dependent on the initial fair launch and the enduring value of the burned asset.

Projects use burn mechanisms as a deflationary tool to manage token supply and influence value. This is often implemented via:

• Transaction fee burning: A portion of fees paid in the network's native token is permanently destroyed (e.g., Ethereum's EIP-1559 burns a base fee).
• Buyback-and-burn programs: A protocol uses its revenue to buy tokens from the open market and destroy them, similar to a stock buyback.
• Targeted burns to reduce inflation or remove tokens from a specific pool, such as unsold tokens from a fundraising event.

Burning tokens can serve as a cryptoeconomic commitment to gain access to network features or resources, creating a sybil-resistant gate.

• Layer 2 Access: Burning a fixed amount of the base layer token (e.g., ETH) to mint a node license or validator key on a rollup.
• Resource Allocation: In decentralized storage or compute networks, burning tokens can be required to reserve a specific amount of bandwidth or processing power for a set period, proving serious intent.

Burn-and-mint protocols are a foundational model for trust-minimized cross-chain bridges. The process is:

1. User burns Token A on Chain X.
2. A verifier or oracle network proves the burn event.
3. An equivalent amount of wrapped Token A is minted on Chain Y.

• This creates a 1:1 pegged asset without requiring a centralized custodian to hold the original tokens. The reverse process (burning on Chain Y, unlocking on Chain X) maintains the peg.

Burning tokens can be used as a costly signal in decentralized governance or reputation systems.

• Quadratic Voting: Some governance models incorporate a burn mechanism for votes, where the cost of additional votes increases quadratically (burning more tokens), limiting whale dominance.
• Reputation Staking: A user may burn tokens to acquire a non-transferable soulbound token (SBT) that represents a long-term commitment to a DAO or protocol, signaling alignment beyond financial speculation.

In decentralized finance, burning mechanisms can eliminate or reduce counterparty risk in certain financial primitives.

• Self-Repaying Loans: In protocols like Alchemix, users deposit collateral (e.g., ETH) to mint a stablecoin loan (alETH). A portion of the yield generated by the collateral is automatically used to burn the debt token, repaying the loan over time without requiring the user to make manual payments or face liquidation risk from price volatility.