21 Mar 2022 · 4 min read

Proof-Of-Transfer Consensus To Deliver Tools Needed To Build New Networks On Top Of Bitcoin

Disclaimer: The Industry Talk section features insights by crypto industry players and is not a part of the editorial content of Cryptonews.com.

Blockchains are ordinarily distributed decentralized networks, meaning there is no central authority to verify, validate, and facilitate transactions; yet, every transaction on the blockchain is highly secured and fully verifiable. This is possible because of the underlying consensus mechanism that drives the network.

Consensus mechanisms are the backbone of almost every blockchain network that exists. They are of multiple types and are used to achieve “consensus” and establish “trust” among the network users and participants. A consensus mechanism, also known as consensus algorithm or consensus protocol, is a set of predefined rules that incentivizes network participants to verify, validate, and record transactions in a public ledger. 

While several different consensus algorithms exist, Proof-of-Work (PoW) and Proof-of-Stake (PoS) are among the most widely used mechanisms in today’s blockchain ecosystem. 

But instead of covering PoW, PoS, or other existing consensus mechanisms, take a closer look at one of the newest mechanisms called the Proof-of-Transfer (PoX) designed to add new features and functionalities to existing PoW chains. 

Proof-Of-Transfer: A Potential Game Changer?

Blockchain consensus mechanisms rely on network participants' computational power or financial resources to function properly. For example, miners supply the required computational power that secures the Bitcoin network. Likewise, in the case of Ethereum, the network maintains its security through the financial resources provided by the network participants via staking.

By design, PoW (proof-of-work) employed by the Bitcoin network is the most secure consensus mechanism. However, the drawback of this security is other limitations. Introducing new features on the Bitcoin network’s core protocol is extremely difficult. Even if you succeed at incorporating new features, they only add more complexity to the already sophisticated algorithm utilized by the network.

This is where PoX comes to the rescue. Introduced by Stacks, a layer-1 blockchain network, Proof-of-Transfer (PoX) is a novel way to extend the capabilities of the Bitcoin network, allowing developers to deploy smart contracts and dApps on it without modifying any of the core features. Up until now, Bitcoin (BTC) and the Bitcoin network supported only a handful of use cases. Yet, with Stacks’ PoX consensus mechanism, developers can now tap into decentralized finance (DeFi), non-fungible tokens (NFT), and play-to-earn (P2E) gaming ecosystems through the Bitcoin network.

According to the Stacks team, “Proof-of-transfer (PoX) is an extension of the proof-of-burn mechanism. PoX uses the proof-of-work cryptocurrency of an established blockchain to secure a new blockchain. However, unlike proof-of-burn, rather than burning the cryptocurrency, miners transfer the committed cryptocurrency to some other participants in the network.”

In this context, Proof-of-Burn is another unique consensus mechanism where miners compete with each other by “burning” PoW tokens as a proxy for computing resources. For example, if a network follows the Proof-of-Burn algorithm with BTC as a base currency, miners will need to “burn” BTC tokens to increase their chances of being selected for block creation. 

Unlike PoW networks, where the initial hardware costs of mining are too steep for most users, or PoS networks where everything is decided based on the money you have invested in the native tokens, PoX has extremely lenient entry barriers. It doesn’t require specialized hardware or a wallet full of native tokens.

PoX: The Process

Stacks is a layer-1 blockchain that operates on top of the Bitcoin network. Leveraging the PoX consensus mechanism, projects can build new networks with their own features on top of the Bitcoin network while retaining the security offered by its PoW mechanism. Although the official whitepaper breaks down every aspect of the Proof-of-Transfer (PoX) algorithm, here’s a quick overview of its functionality.

In the case of Stacks’ PoX mechanism, there are two major classes of network participants and the platform-native STX token that builds up the entire infrastructure:

  • Miners - this group of network participants spends their BTC to earn STX tokens and other rewards
  • Stackers - this group of network participants supports the Stacks chain by “stacking” STX tokens and earning BTC in exchange

STX miners bid to become the leader for new blocks by spending BTC. The underlying protocol auto-selects a winner using a verifiable random function (VRF). The winner (or the block leader) adds the new block and, in turn, mints the network rewards, including newly minted STX tokens and a portion of the network’s transaction and smart contract fees. The BTC used earlier for bidding is then sent to specific addresses corresponding to the STX token holder wallets that actively participate in the Stacks network’s consensus. All wallets are selected using VRF.

The best part about PoX is that funds never leave the user’s wallet. Accordingly, there is no risk of losing them. Besides, earnings are paid in BTC, whereas the reward-generating asset is STX, implying no added pressure for users to sell STX. As a result, users are motivated to hold their tokens for longer, thereby increasing the network’s sustainability.

The Stacks network, powered by the Proof-of-Transfer mechanism, will work with the Bitcoin network to finally address the rising demand for DeFi, NFTs, and other emerging products on the legacy chain. Through PoX, Stacks has unlocked the true potential of the Bitcoin network. At the same time, it has also enabled “Bitcoiners” to tap into new revenue streams and earn more BTC.