Proof of Transfer
Introduction to consensus mechanisms
The consensus mechanism is used to reach an agreement on a single truthful state of a network. In decentralized networks such as decentralized blockchains, a consensus mechanism enables agreement, trust and security among all network participants. They require compute or financial resources to secure the blockchain, and the general practice is to make it impossible for any single malicious actor to have enough computing power to attack the network.
There are different types of consensus mechanisms that function differently.
Proof of Work has nodes that dedicate computing resources to secure the network and has high decentralization and security levels. Those computational resources are generally put towards solving mathematical problems for a chance to validate transactions and earn a block reward. Proof of Stake however, has nodes dedicate financial resources.
Proof of Stake and Proof of Work both had to sacrifice something: PoS (Proof of Stake) compromised security for scalability, while PoW (Proof of Work) have syntax limitations by design, making them safe. This is the case of the Bitcoin blockchain, for example.
With Proof of Burn, which is a quite novel consensus mechanism, miners compete by destroying ('burning') a proof-of-work cryptocurrency as a proxy for computing resources.
Proof of Transfer (PoX) solves the programmability problem of the PoW consensus mechanism: it enjoys the security provided by the PoW blockchain, but also enables more day to day activities by users and more programmability. This mechanism was designed to leverage the security of Bitcoin, while allowing more complex interactions within the Stacks ecosystem.
What is Proof of Transfer (PoX)?
PoX uses an established cryptocurrency of a PoW consensus mechanism to create a new and secure blockchain. On a PoX blockchain, rather than committing computational resources, miners commit financial resources by transferring the PoW cryptocurrency of the more established blockchain to another participant in the network. In turn, these miners are rewarded the new blockchain's cryptocurrency.
PoX is an extension of Proof-of-Burn, which was the mining mechanism originally proposed for the Stacks blockchain (founded by Muneeb Ali and formerly known as Blockstack), however, unlike with PoB, the anchor crypto is distributed instead of burned.
PoX offers a model where new blockchains can be anchored to one extremely secure PoW blockchain. This is the case of the Stacks 2.0 blockchain, which is anchored to the Bitcoin Blockchain, enabling the creation of smart contracts secured by Bitcoin. The use of PoX has enabled the creation of apps, NFTs and DeFi products without having to sacrifice security.
PoX can address two challenges: securely bootstrapping new blockchains as well as giving incentives to people to participate in the consensus algorithm, thus stimulating general interest, which helps grow new cryptocurrency systems.
PoX can also enable a powerful smart contract language like Clarity on a new blockchain that benefits from Bitcoin's security without any modification to Bitcoin.
If you'd like to know more about the Proof of Transfer consensus mechanism, you can read the full PoX whitepaper here.
How does PoX work?
Let's use the Stacks blockchain as an example. The anchor cryptocurrency in the Stacks chain is BTC, and the blockchain-specific cryptocurrency is STX. There are two major players in Proof of Transfer: Miners and Stackers.
Miners commit BTC, and the PoX consensus selects a winner by using a verifiable random function (VRF). The winning miner writes new blocks on the Stacks blockchain and receives a newly minted STX token as a reward.
The Bitcoin transferred by miners is then used to provide Stacking rewards, paid in BTC to token holders for helping to ensure a stable network. In other words, STX holders lock up their Stacks tokens and in exchange, receive BTC that has been committed by the Miners.
Such rewards were not possible before PoX. These rewards could be used for use cases such as consensus participation, ecosystem developer funds, incentives for specific players, etc.
Why build on top of Bitcoin?
Both simple and stable, the Bitcoin network provides extensive infrastructure to support the proof-of-transfer consensus mechanism. It is the oldest blockchain protocol, has held the highest market capitalization of any cryptocurrency for the past decade, and has become an asset outside of the cryptocurrency community. It is recognized as an asset by governments, large corporations, and legacy banking institutions, and makes it infeasible for any potential hacker to influence or attack the system.
These are just a few of the reasons the Stacks network was built on top of Bitcoin.
Bitcoin and Stacks progress in lockstep, and their blocks are confirmed simultaneously. On Stacks, this is referred to as an 'anchor block'. Each anchor block is composed of micro blocks, and an entire block of Stacks transactions corresponds to a single Bitcoin transaction. Through the PoX consensus mechanism, each Stacks block is anchored to a Bitcoin block. Stacks is therefore limited to the same block times as Bitcoin.
Clarity smart contracts, which are enabled by PoX, also have unique visibility into the state of the Bitcoin blockchain. The contract logic in a Clarity file has the ability to trigger when specific Bitcoin transactions are confirmed. The Clarity smart contracts make interacting with Bitcoin's state a lot easier for developers, and can fork with the original Bitcoin chain, meaning developers wouldn't need to adjust the deployment of their smart contracts in the event where Bitcoin forks.
Ready to give join the Stacks ecosystem and give PoX a try?