Many different technologies exist within the world of bitcoin and cryptocurrency. Proof of work is by far the most commonly used protocol, which allows users to generate new coins by mining. Proof of stake is also quite popular, as it lets users earn an interest for keeping funds in their wallet. Proof of Burn is also a nifty concept that is currently underappreciated. Now would be a good time to compare all of these protocols and what their place is in the cryptocurrency world.
Proof of Work
In the world of bitcoin and cryptocurrencies, proof of work is the most common protocol. It is the protocol that allows users to mine the currency, in the Bitcoin world, proof-of-work is the only protocol that will ever be used, based on the current codebase. Other cryptocurrencies use a mixture of proof of work and proof of stake. It is doubtful bitcoin will ever use proof of stake in the future, though, as the total coin supply is fixed at 21 million BTC.
One downside to using proof of work is how it is a very intensive process. Using the proof-of-work protocol for a longer period of time will increase the mining difficulty, which results in miners having to invest in more powerful hardware to complete this task. It also requires significant amounts of electricity to generate new coins through the proof of work protocol. This trend is also apparent in various altcoins, where ASIC mining hardware is becoming the new norm as time progresses.
Proof of Stake
As we briefly touched upon earlier, proof of stake revolves around users who stake their cryptocurrency wallet balance. Not every cryptocurrency supports proof of stake, yet it is quite a common protocol in the world of altcoins. Once a user has a balance in their wallet, they need to keep the wallet open and connected to the internet to earn stake rewards. This process can take hours or even days to complete, which is why most people host their wallet on an online server.
Cryptocurrency users looking to stake their coins can increase their chance of earning a stake by increasing the amount kept in their wallet. People who own a significant percentage of the total coin supply will earn more stakes, which is only normal. Depending on which crypto one is using, the proof of stake rewards may cause inflation. Some other currencies, which use proof-of-stake from day one, keep their supply steady at all times.
Proof of Burn
Proof of Burn is a protocol used by various altcoins to reduce the current available supply, whereby a specific portion of coins in circulation is sent to a wallet no one has access to. This effectively eliminates these coins from being spendable, although they will still be a part of all of the existing coins ever to be generated. Proof of Burn transactions are also recorded on that cryptocurrency’s blockchain, providing inevitable proof that the coins would never be used to transact again.
It is important to keep in mind burning coins is an expensive process. In most cases, the only coins burned are those generated by the proof-of-work process to maintain scarcity.
Another use case for proof of burn is to bootstrap one cryptocurrency to another. A good example is the Counterparty protocol, which uses the colored coins functionality. Participants have to transfer bitcoin to an unspendable address to receive Counterparty tokens in exchange.
What Else is Out There?
Other proof protocols exist in the world of cryptocurrency as well. For example, proof of space – also known as proof of capacity – uses megabytes of storage as a resource. Projects such as Storj use this algorithm, which makes it one of the most energy efficient cryptocurrencies in the world today. Proof of activity is also worth mentioning, as it is a hybrid system combining proof of work and proof of stake.
Are you familiar with any other proofs of resources that altcoins use? Let me know in the comments.