Cointelegraph is following the development of an entirely new blockchain from inception to mainnet and beyond through its serial, Within the Blockchain Developer's Mind. In previous parts, Andrew Levine of Koinos Group discussed some of the challenges the team has faced since identifying the central issues they intend to solve, and outlined three of the "crises" that are holding back blockchain adoption: upgradeability , scalability and governance . This series is focused on the consensus algorithm: Office one is about proof-of-work , function two is well-nigh proof-of-pale and function three is about proof-of-burn.

In the offset article in the series, I explored proof-of-work (PoW) — the OG consensus algorithm — and explained how it works to bootstrap decentralization merely also why it is inefficient. In the 2nd article, I explored proof-of-pale (PoS) and how it is practiced for lowering the operating costs of a decentralized network relative to proof-of-work, but also why it further entrenches miners, requires circuitous and ethically questionable slashing conditions and fails to prevent "substitution attacks."

In this article, I will explicate the third consensus algorithm that was proposed almost a year after proof-of-stake merely, for reasons that should become clear, has never actually been implemented as a consensus algorithm on a full general purpose blockchain. At least, not until at present.

Proof-of-piece of work

As I explained in the first commodity, from a game-theoretical perspective blockchains are a game in which players compete to validate transactions by group them into blocks that match the blocks of transactions existence created by other players. Bitcoin (BTC) works past assigning more weight to blocks produced by people who have probably sacrificed more capital which they "show" through "work."

Since these people take already spent their coin to acquire hardware and run it to produce blocks, their punishment is easy because they've already been punished. Proof-of-stake, still, operates in a fundamentally unlike way that has important game-theoretical consequences.

Proof-of-pale

Instead of forcing block producers to sacrifice capital to acquire and run hardware in order to gain the ability to earn block rewards, in proof-of-pale, the token holders demand just sacrifice the liquidity of their uppercase in order to earn cake rewards. The trouble is it decreases network security because the aggressor need but learn 51% of the base currency of the platform and stake it to take control of the network.

To thwart this assail, PoS systems that must implement complicated systems designed to "slash" block rewards from user accounts, which adds to the computational overhead of the network, raises legitimate ethical concerns and only piece of work if the assaulter fails to learn 51% of the token supply. Implementing these slashing conditions is by no means trivial, which is why so many proof-of-stake projects like Solana accept, by their own admission, launched with centralized solutions in identify, and why so many other projects similar Ethereum 2.0 (Eth2) are taking so long to implement PoS. The typical solution is to give a foundation a large enough stake and so that it alone has the power to determine who is a malicious actor and slash their rewards.

This is especially problematic in a earth with centralized exchanges that characteristic custodial staking which means it can observe itself in control of over 51% of a given token supply without having incurred whatsoever risk, making the toll of an attack deminimus. In fact, this has already happened in recent history on 1 of the most used blockchains in the world, at 1 time valued at nearly $ii billion: Steem.

Related: Proof-of-stake vs. proof-of-work: Differences explained

Holy Grail consensus

Equally I said at the end of my last commodity, what we will be discussing in this article is the hypothetical question of whether at that place is a "best-of-both-worlds" solution that delivers the decentralization and security of proof-of-work with the efficiency of proof-of-stake. Today, nosotros are excited to announce the release of our white paper on proof-of-fire. In that white newspaper, we argue that proof-of-fire is exactly that all-time of both worlds solution.

Iain Stewart proposed proof-of-burn down in 2022 — a year later on proof-of-pale — as a thought experiment designed to contrast the differences betwixt proof-of-work and proof-of-stake. We believe that he unwittingly discovered the "holy grail" of consensus algorithms that got lost in the sands of time due largely to historical accidents. As Iain Stewart noted:

"I idea it would be interesting to invent a task that is absolutely, nakedly, unambiguously an case of the contrast between the 2 viewpoints. And yes, there is 1: burning the currency!"

The substitution set on

Equally the former core development team behind the Steem blockchain, we have intimate experience with substitution attacks. This is why mitigating this assault vector was of the utmost importance and inspired blockchain architect Steve Gerbino to explore alternative consensus algorithms in search of a solution that would still requite us the operation and efficiency necessary for a high performance world computer, all while mitigating this important attack vector.

Proof-of-fire equally a consensus algorithm is remarkably uncomplicated and its unique value is easy to understand. Like proof-of-work, information technology requires that the cost of attacking the network be paid "upfront." Similar proof-of-stake, no actual hardware has to exist purchased and run bated from the hardware required to produce blocks. Similar proof-of-work, the exchange attack is thwarted because the cake producer has already lost their money, as they are just trying to get it back by maintaining a correct ledger.

In order to mount a 51% attack, the malicious thespian doesn't but need to larn 51% of the token supply, they demand to provably dispose of it past acquiring virtual mining hardware. The only way to recoup that loss is by producing blocks on the chain that ultimately wins. It'southward a remarkably simple and elegant solution to the problem. At that place is no demand for slashing conditions considering the block producer effectively slashed their ain stake at the very beginning.

Proof-of-burn

Iain Stewart proposed proof-of-burn down for Bitcoin a year before a full general purpose blockchain was fifty-fifty conceived of by Vitalik Buterin. Maybe that is why information technology has taken this long for people to realize that these 2 things work together incredibly well. General purpose blockchains place a loftier premium on efficiency while allowing for token economical designs without max supply caps, a requirement for proof-of-burn implementations. Part of the trouble might too take been that several innovative concepts like nonfungible tokens (NFTs) and market makers, and solutions such every bit upgradeable smart contracts are extremely beneficial to the implementation and just emerged after the proposal.

NFT miners

Keeping track of which accounts have burned what amounts and when they were burned tin can be a computationally demanding job and this increased load on the network could exist one of the reasons why people have avoided this implementation.

Fortunately, nonfungible tokens provide u.s.a. with a powerful primitive which the arrangement can use to efficiently continue track of all of this information for the purpose of distributing block rewards to valid block producers. The end result is an NFT that effectively functions equally a virtual miner, just also one that is infinitely and precisely customizable.

Blockchain developers tin precisely regulate the accessibility of their platforms based on how they price their miner NFTs. Pricing the miners loftier would be similar requiring the purchasing of ASICs (miner machines) in order to participate in block production. Pricing the miners depression would exist like assuasive anyone to mine on commodity hardware. But, the best part is that no bodily hardware is required either way.

Since Koinos is all about accessibility, miner NFTs volition likely have a low toll, which is effectively like having the ultimate GPU and ASIC resistant algorithm possible. But, this begs the question: "What if you pick the wrong number?" This highlights the importance of modular upgradeability. On Koinos, all business logic is implemented as smart contract modules which are individually upgradeable without a hard fork. This means that if, for case, the price of KOIN were to explode to the degree that the stock-still cost of miners was no longer sufficiently accessible, governance could just vote to lower that price and the number would be updated the moment there was a consensus.

Centralization resistance

Fixing the cost of miner NFTs is like building the most GPU- and ASIC-resistant algorithm possible because no one can gain an advantage by acquiring specialized hardware. Better nonetheless, it makes the miner NFTs more uniform and therefore easier to sell (more fungible) on a decentralized exchange, meaning that block producers are taking on less risk because they can always liquidate their miners.

The power of proof-of-burn ultimately stems from the fact that nosotros are internalizing the mining hardware to the system. It is virtual hardware, which ways that information technology is infinitely customizable past the organization designers to maximize the performance of the network. One consequence of this is that the system tin exist designed to ensure that the miner will earn dorsum their burn plus some boosted tokens — a guarantee that cannot be made by proof-of-work systems.

This customizability as well allows us to mitigate 51% attacks by designing the system then that as the need for miners increases, the payback menses gets extended.

Now, imagine that someone (like an exchange) wants to take over block product. First, they would need to burn more than tokens than everyone else combined. Even then, they will have gotten nothing for it. They will need to brainstorm producing blocks on the winning concatenation to begin to earn back their rewards. During that time, other network participants would be able to meet what is happening and respond accordingly. If they feel that the player is attempting to take control of governance, they can only buy more miners, pushing dorsum the payback window for the malicious thespian until they "arrive line."

Token economics

Proof-of-burn as well has interesting economic properties that separate it from both Pw and PoS. For example, if you were to gear up the rate of new token cosmos (aka "inflation"), then, at a certain betoken, if too many people were to participate in cake production, then the token economy would plow deflationary because rewards would be getting pushed dorsum faster than new tokens were being created. This could provide performance benefits to the network, if necessary.

Many people producing blocks tin can negatively impact latency. This deflationary component would serve to dynamically disincentivize excessive cake product, while too providing the ecosystem with an important economic lever, or deflation.

Information technology was my goal with this series to give the reader an insanely deep agreement of the topic of consensus algorithms in a style that was still attainable and, hopefully, interesting. We've covered the historical arc of the major consensus algorithms and what I call up is the next development: proof-of-burn. I hope that y'all are now equipped to evaluate different consensus implementations for yourself and come to your own conclusions about what is innovating and what is not.

The views, thoughts and opinions expressed here are the author's alone and practice not necessarily reflect or represent the views and opinions of Cointelegraph.

Andrew Levine is the CEO of Koinos Group, a team of industry veterans accelerating decentralization through accessible blockchain technology. Their foundational product is Koinos, a fee-less and infinitely upgradeable blockchain with universal language back up.