What Is Proof-of-Transfer (PoX)?

Blockchains use consensus algorithms that leverage computational power or financial resources to secure the network. A decentralized consensus makes it difficult for malicious actors to attack the network. However, there are many different variations to consensus algorithms, each focusing on a specific aspect like decentralization, security and scalability.

The Bitcoin Layer2, Stacks, uses a unique Proof-of-Transfer (PoX) consensus mechanism to secure itself.

In this article, we’ll explain what Proof-of-Transfer is, how it works, and how the Nakamoto upgrade improves the PoX system.

What Is Proof-of-Transfer (PoX)?

Proof-of-Transfer (PoX) is a novel consensus mechanism that extends the Proof-of-Work (PoW) and Proof-of-Burn models.

To recap, In the Proof-of-Work consensus mechanism, nodes 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 PoW tokens as a proxy for computing resources.

The Proof-of-Transfer (PoX) consensus mechanism combines and modifies both these algorithms. Instead of burning PoW tokens, Proof-of-Transfer enables miners to transfer the PoW assets to other network participants.

Stacks’ PoX mechanism consists of two primary contributors, miners and Stackers. Moreover, Stacks uses its native token STX along with the anchor chain, Bitcoin’s BTC for running PoX.

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.

To better understand Stacks’s PoX mechanism, let us elaborate on how they function.

How Does Proof-of-Transfer (PoX) 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 amount 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. 

Stacking occurs in approximately two weeks with reward cycles of 2,100 Bitcoin blocks. During each reward cycle, 2,000 blocks are mined. There are 4,000 Stackers per reward cycle since two Stackers receive BTC rewards for every block.

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.

How The Nakamoto Upgrade Improves PoX

The Stacks Improvement Proposal (SIP-007) introduced the Proof-of-Transfer consensus mechanism. However, PoX was upgraded through SIP-015 and SIP-021, making Stackers a crucial part of PoX. Here’s how the Nakamoto Upgrade has affected both Stackers and Miners:

Stackers

Stackers have become more involved in the mining process by acting as signers. Now, Stackers have to collectively validate, store, sign, and propagate each Stacks block the miner produces before the next block production.

In this current iteration of Stacks, miners don’t have the power to nullify confirmed transactions like before. Thus, the upgrade ensures miners don’t produce forks and confirm all prior Stacks blocks.

The Stackers now carry out miners’ tenure change which means Stackers agree on the last-signed block from the current miner.

Since Stackers agree only to sign a miner’s block which descends from the last-signed block, Stackers prevents miners from mining forks. It further ensures miners begin their tenures by building a block on the canonical chain tip to prevent forking.

Miners

The Nakamoto upgrade separates the responsibilities of miners and Stackers within the PoX system. Now, miners decide the block contents and Stackers decide whether to include the block in the chain.

Secondly, miners could censor Stacks block commit transactions to help them earn STX rewards without spending much BTC. However, the Nakamoto upgrade changes the leader election algorithm by compelling miners to spend sufficient BTC for validating blocks. 

Thirdly, a block-commit transaction where a Stacks miner ‘commits’ a Stacks block to the Bitcoin chain, only contained the Stacks block hash. In post-Nakamoto Stacks, miners have to include a consensus hash of all previously accepted Bitcoin transactions in addition to the new block’s hash.

The miners’ block commit transactions to the Bitcoin chain now include the indexed block hash of the previous miner’s first-produced Stacks block. It helps anchor Stacks’ chain history to Bitcoin till the previous miner’s tenure, ensuring complete Bitcoin finality and resolving miner connectivity issues.

And lastly, in post-Nakamoto Stacks, miners create blocks every five seconds and send them to Stackers for validation and signing. If Stackers reach at least 70% quorum or agreement, they replicate the block to the rest of the blockchain, enhancing network scalability.

Expanding Bitcoin’s Potential With Stacks’ PoX

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 Layer1 network.

PoX is permissionless so anyone can be a Stacks miner and Stacker if they spend BTC or lock STX tokens respectively. Since network participants don’t need special hardware, PoX creates opportunities to earn additional yields for securing Stacks.

The Proof-of-Transfer also provides new business options and funding models for dapp builders and general users to expand the possibilities of Bitcoin.

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