Proof-of-Transfer (PoX) is Stacks’ consensus mechanism that allows the verification and transaction of crypto assets with lower energy consumption. Instead of solving complex mathematical problems like Bitcoin's Proof-of-Work (PoW) consensus, Stacks' PoX consensus validates transactions by providing proof of ownership and burning of assets.
What Is Proof-of-Transfer?
Proof-of-Transfer (PoX) is a novel consensus mechanism that extends the Proof-of-Work (PoW) and Proof-of-Burn models.
In the Proof-of-Work consensus mechanism, miners compete with their computing resources to validate transactions and earn rewards. On the other hand, in Proof-of-Burn, miners compete by burning or destroying tokens as a proxy for computing resources.
With Proof-of-Transfer, instead of utilizing computing resources or burning BTC, miners transfer tokens to other network participants. The mechanism works thanks to the participation of miners and Stackers, which use Stacks native token STX along with Bitcoin’s BTC to run it.
Stackers lock their STX tokens in a process called stacking to participate in PoX consensus and earn BTC rewards. Consequently, miners transfer BTC to Stackers to win block rewards and transaction fees.
PoX is an energy-efficient consensus mechanism that recycles Bitcoin’s PoW energy requirements. Thus, Stacks miners spend the already mined BTC and transfer them to Stackers instead of burning to earn rewards.
How Does Proof-of-Transfer (PoX) Algorithm Work?
Stacks’ Proof-of-Transfer participants, namely miners and Stackers, have respective roles in the consensus mechanism.
Stackers
Stackers lock their STX holdings for one or more cycles of block production. Stackers can only unlock their STX when the number of cycles they committed ends.
Now, stackers can choose to lock their STX independently or collectively with other Stackers depending on the amount of STX they lock. To lock their tokens, Stackers must provide a BTC address to receive their rewards from miners, which are proportional to the amount of STX they stacked. Additionally, Stackers have a dynamic minimum threshold for the amount of STX tokens they must lock.
Rewards come in cycles of approximately two weeks. During the reward phase, only 2,000 Bitcoin blocks are mined. For each block, only two Stackers can be rewarded with BTC, and the algorithm selects them randomly. This means only 4,000 Stackers get rewarded each cycle.
Miners
The miners transfer BTC to Stackers to get a chance for Stacks block production in exchange for block rewards and transaction fees. A random weighted function elects the winning miner. The chance of winning is directly proportional to the amount of BTC transferred to Stackers compared to other miners.
The winning miner gains the right to create microblocks and commit new blocks to the Stacks chain. Upon successful block production, the miner receives newly minted STX tokens as block rewards plus transaction fees.
Pros and Cons of Proof-of-Transfer
This kind of consensus mechanism has many benefits but also a few drawbacks.
Pros of Proof-of-Transfer
Improved energy efficiency
Better scalability
Maintains Bitcoin’s Proof-of-Work security
Allows for programmability
Fair distribution of rewards
Provides economic incentives
Cons of Proof-of-Transfer
Depends on existing blockchains
Is vulnerable to base-chain issues and attacks
Miner centralization and monopolization risks
Complexity and implementation challenges
Unproven long-term viability
Requires ongoing research, establishment of standards, and continuous testing
How The Nakamoto Upgrade Improves PoX
The Nakamoto upgrade brought many improvements to the PoX consensus mechanism by separating the responsibility of miners and Stackers.
This is how it has affected Stackers:
They have to collectively validate, store, sign, and propagate each Stacks block the miner produces before the next block production.
They have to agree on the last-signed block from the current miner preventing miners from mining forks.
They decide whether to include a block on the chain.
If Stackers reach at least 70% quorum or agreement, they replicate the block to the rest of the blockchain.
And this is how it has affected miners:
They don’t have the power to nullify confirmed transactions like before.
They can’t produce forks nor confirm all prior Stacks blocks.
They decide the block contents but can’t validate them.
They create blocks every five seconds and send them to Stackers for validation and signing.
They are compelled to spend sufficient BTC for validating blocks.
They have to include a consensus hash of all previously accepted Bitcoin transactions in addition to the new block’s hash.
What is PoX in Stacks?
Stacks’ Proof-of-Transfer (PoX) consensus mechanism allows Stacks-based apps to inherit Bitcoin’s security and use it as a transaction settlement layer. Further, the PoX-Bitcoin relationship helps web3 developers leverage Bitcoin’s properties without modifying the Layer 1 network.
PoX is permissionless, so anyone can be a Stacks miner and Stacker if they spend BTC or lock STX tokens, respectively. It also provides new business options and funding models for dapp builders and general users to expand the possibilities of Bitcoin.