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Proof-of-Transfer in 2024: an Improvement Over the Old PoW?

Blockchains have become popular in the last couple of years. They use different consensus mechanisms. However, there has not been a best solution as each different consensus mechanism had to sacrifice something. 

Proof-of-stake (PoS) consensus compromised security for scalability whereas Proof-of-work (PoW) blockchains such as Bitcoin have syntax limitations by design as it makes them safe. However, in order to be used more in day-to-day activities by users, it must be more programmable. Proof-of-transfer(PoX) solves this problem as the PoX-developed blockchain enjoys the security provided by the PoW blockchain but also enables programmability in its blockchains. 

After reading this article, you will have a clearer understanding of the proof-of-transfer consensus mechanism. 

What is the consensus mechanism?

The Consensus mechanism is a mechanism that is used to reach an agreement on a single truthful state of a network. In decentralized networks such as decentralized blockchains, a consensus mechanism is a crucial part as it enables agreement, trust, and security among all network participants. Different types of consensus mechanisms function differently. (Figure 2)

Figure 2. Consensus mechanism comparison

This picture shows a table that compares different consensus mechanism.
Source: PoX whitepaper

PoW 

Advantages

  • A high level of security as any one bad actor, or even a single group of bad actors, will not have enough computational capacity to overwhelm and influence the network. 

Disadvantages

  • Slow transaction speed.
  • High energy usage and greenhouse gasses emissions with existing energy production methods
  • Usually Requires expensive equipment for mining.

PoS

Advantages

  • Considerable lower energy consumption compared to PoW.
  • No ongoing cost after making the initial investment.

Disadvantages

  • Incentives coin hoarding which can decrease decentralization. 
  • Lower level of security compared to PoW.

PoB

Advantages

  • Reduction in the coin circulation supply by burning.
  • Coins are burned in a virtual mining rig that does not require mining hardware.

Disadvantages

  • Verification of the miners’ work tends to take longer than expected. It is slower than in blockchains with proof of work.
  • Coin burning is not always transparent or simple for the common user to verify.

PoX

Advantages

  • Does not require any special hardware.
  • Maintains the security of PoW.
  • Recycles PoW energy expenditure 

Disadvantages

  • Has not been tested on a large enough scale yet. 

What is the Proof-of-transfer?

PoX is an extension of the Proof-of-burn (PoB) mechanism. It utilizes an established cryptocurrency of a PoW consensus mechanism (anchor blockchain) to create a new and secure blockchain. The main difference between PoX and PoB is that the anchor cryptocurrency is distributed to the network participants instead of being burned. 

Stacks is the first blockchain that was created using PoX as its consensus mechanism. It uses PoX to link with the Bitcoin blockchain. It enables the creation of smart contracts that are secured by the Bitcoin blockchains. This has opened a new door for making NFTs and DeFi products that have high security provided by Bitcoin. 

To understand more about Bitcoin smart contracts, read Bitcoin Smart Contracts: Challenges & Solutions.

How does PoX work?

The Stacks blockchain uses PoX, thus for the sake of clarity, we will use Stacks as an illustration of how PoX works. The anchor cryptocurrency in Stacks blockchains is BTC, and the blockchain-specific cryptocurrency is STX. PoX works as follows:(see Figure 2):

  1. Miners commit BTC and the PoX protocol selects a winner using a verifiable random function (VFR). The winner writes new blocks on the Stacks blockchain and receives a newly minted STX as a reward. 
  2. STX holders who participate by Stacking their STX coins will receive BTC that has been committed by the Miners.

Figure2. How does PoX work?

This picture shows how the how PoX function in details
Source: Medium

Further reading 

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Cem Dilmegani
Principal Analyst
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Cem Dilmegani
Principal Analyst

Cem has been the principal analyst at AIMultiple since 2017. AIMultiple informs hundreds of thousands of businesses (as per similarWeb) including 60% of Fortune 500 every month.

Cem's work has been cited by leading global publications including Business Insider, Forbes, Washington Post, global firms like Deloitte, HPE, NGOs like World Economic Forum and supranational organizations like European Commission. You can see more reputable companies and media that referenced AIMultiple.

Throughout his career, Cem served as a tech consultant, tech buyer and tech entrepreneur. He advised businesses on their enterprise software, automation, cloud, AI / ML and other technology related decisions at McKinsey & Company and Altman Solon for more than a decade. He also published a McKinsey report on digitalization.

He led technology strategy and procurement of a telco while reporting to the CEO. He has also led commercial growth of deep tech company Hypatos that reached a 7 digit annual recurring revenue and a 9 digit valuation from 0 within 2 years. Cem's work in Hypatos was covered by leading technology publications like TechCrunch and Business Insider.

Cem regularly speaks at international technology conferences. He graduated from Bogazici University as a computer engineer and holds an MBA from Columbia Business School.

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