Virtualizing Hash Power in Bitcoin with Proof of Burn
Satoshi's original vision for PoW was an egalitarian way of securing Bitcoin; however, the free market pushed mining competition to lengths so great that they became harmful and unproductive, which was likely beyond his original imagination.
Koinos Group has created a consensus protocol named Koinos Proof of Burn (KPoB) that virtualizes PoW and allows mining to return to Satoshi's original egalitarian vision. The KPoB protocol does this by requiring a miner to burn the native asset before they are allowed to produce blocks and mint new tokens. Burning the asset mimics the fiat expended to purchase and maintain mining equipment, as seen in PoW. This massively reduces energy consumed to secure the network, lowers the barriers to entry for miners, and increases both accessibility and decentralization. The key to this is employing Virtual Hash Power (VHP).
Hash Power is Really About Money Flows
The more hash power a processor has, the faster it can resolve mathematical problems and find a solution, the critical component in PoW systems. The faster the answer is found, the more profitable a PoW miner's operations are.
Profitability in PoW typically revolves around three things:
- Money spent on increasingly powerful processors
- Money spent on electricity to power and cool the processors
- Money is spent on housing and protecting the processors.
Each of these three components involves a constant expenditure of real money and forces the miner to operate in the interest of recovering their actual losses continuously. If a miner's goal is to create new tokens, then losing existing tokens must also be considered actual losses. So instead of spending real fiat money on real hash power, what if we created a system that forces the miner to spend the token to acquire virtual hash power? At the end of the day, regardless of whether or not the hash power is real or virtual, miners only have one thing on their mind:
Since digital resources are understood to have real value, it is possible to virtualize the entire design of Proof of Work by leveraging virtual resources, namely the token itself. This is the principal design feature of Koinos Proof of Burn and Virtual Hash Power.
Virtualizing Hash Power
Here is an example of how KPoB would be employed on the BTC network using VHP.
Instead of spending fiat money on hardware, electricity, and other overhead costs to acquire real processors with real hash power, a miner spends those funds on BTC and burns it following the KPoB consensus protocol.
The KPoB protocol creates and deposits VHP into the miner's token address as a fungible token. Burning more BTC directly creates more VHP at a 1:1 relationship. Burning BTC effectively proves that a miner is a severe participant because the miner is destroying the very thing they are trying to create.
After burning BTC to acquire VHP, a Verifiable Random Function (VRF) in the KPoB protocol is used to select the next miner to produce the next block randomly; however, the miner must turn over a fixed amount of their VHP tokens for the privilege of writing the block and earning the reward.
Over time, more BTC will need to be burned to acquire more VHP tokens so the miner can continue mining. This directly mimics the ever-changing landscape that PoW miners face when new mining equipment is developed and sold and the constantly changing landscape of power production.
Employing VHP drastically reduces the energy consumption of PoW and creates a significantly more egalitarian approach to consensus compared to both PoW and PoS.
How it works under the hood
Below is a table of the variable and constant parameters between PoW and PoB. It has been color-coded based on similar traits between the two.
Analogy to XYK Markets
We can use XYK markets to prove this concept works. Mining is effectively a market in its own right. Yet, the main differences are that in PoW, everyone is operating under their own XYK function, while in KPoB, everyone operates under standardized XYK. Let us dig deeper!
Both X and Y are variables that are adjusted to match a constant K.
In PoW, the constant K is the block reward, fixed at 6.25 BTC per block produced. Miners can adjust both the cost of acquiring hash power (X) and the time (Y) they are willing to commit to continuing mining to make the 6.25 BTC block reward worth their effort. The actual K is less than 6.25 BTC during bear cycles, so miners are operating at a loss. The real K is more than 6.25 BTC during bull cycles, so miners are highly profitable.
Since each miner has a varying ability to control X and Y, a miner's choices to control these variables are effectively randomized. Nevertheless, some miners will be better equipped to reduce the cost of hash power (X) and endure more extended bear markets (Y). This is precisely what causes PoW not to be egalitarian. Despite this, the random nature introduced by an individual miner's choices is also the same randomness that we want to replicate in a virtualized design.
In KPoB, the constant K is the cost of acquiring Virtual Hash Power, fixed for BTC at a 1:1 ratio. Miners will receive a varying amount of rewarded BTC (X), which causes the time (Y) that the miner is willing to commit to mining to vary. Because an individual miner's choices cannot control the reward (X), and they cannot control time (Y) for ROI, resulting in a protocol they cannot exploit.
The way KPoB employs VHP effectively creates a more fair and equal consensus protocol that is provably egalitarian. Remember that systems should be naturally inclined to move towards decentralization in the blockchain world instead of requiring an entity to force it.
While I am not proposing changing BTC to KPoB, I do think that future blockchain projects should consider KPoB over PoS because it creates a more decentralized environment at launch. If you want to know more about KPoB, consider looking at the Koinos Blockchain at koinos.io or the KPoB white paper found here.