WTF is Proof of Transfer (and Why Should Anyone Care)?

If you’re in crypto, you know that Proof of Work or ‘PoW’ powers consensus on Bitcoin’s legendary blockchain. You probably know Proof of Stake (PoS) systems, too. Between the two, they power nearly all the major players in the world of blockchains today. 

So WTF is Proof of Transfer (PoX)? The short answer: It’s a mining mechanism that provides a new take on consensus, allowing for a Proof of Work chain (in Stacks' case, Bitcoin) to be leveraged and extended in important new ways. 

But, that doesn’t really tell you all that much does it? In this post, I’ll break down what PoX really is and more importantly, why it’s needed.  

To understand the need for PoX, it helps to understand a little about the tragic state of the internet today and the broken surveillance capitalism business models that power it. 

Even a quick scan of the news shows you just how parasitic business models, highly concentrated wealth and power, and a complete lack of digital rights have distorted and destroyed the open internet. There’s nothing open about it anymore.  We wanted an internet for people, of people, and by people, but what we got was a Panopticon tracking our every move in order to sell us stuff we don’t need.

The key to pushing past these broken business models and imbalance of power is true digital ownership. Right now you don’t own anything about your digital life; Facebook, Instagram and TikTok own it. If you connect with 10,000 people on Twitter, you don’t own those connections. Twitter owns them. If you build a big discussion group on Facebook with 25,000 people and you all share stories and ideas, Facebook owns those stories. If you want to leave Facebook you leave all that content you created behind. It’s locked in a digital citadel. You leave the laughter and debates between you and all your friends.  Every back and forth, every comment is gone.  

The things you don’t own, end up owning you.

But what if it were different?

What if you owned your connections, your comments, all of the banter between you and your friends. It’s like going into a bar with three of your best pals.  You own the jokes and discussions between you, not the bar.  If the bar isn’t a good place, you leave and go to another bar and take your friends with you. 

PoX helps us deliver that in the digital world.  You own the relationships, not the bar or platforms you’re a prisoner of right now.

With digital ownership comes freedom. When we take back our digital freedom the old pillars that prop up the current system start to crumble.

Network lock-in disappears.  People can pick up and leave without losing their life’s work or their community. When people own their data and they can choose where it goes and what companies can do with it, ad-based models will get ripped up, replaced or re-balanced.  It will force companies to compete for your business. Today, companies grow to a certain point and they don’t have to care about you anymore; they achieve a network effect and they’re done. They can stop innovating and they can stop serving your best interests because they have you locked in.

When you own your data, that dynamic gets flipped on its head. It puts people back in charge and makes it so that companies have to work hard to keep you and serve your interests.

Obviously, we’re not there yet. That’s where Bitcoin and Proof of Transfer come into the picture.

Call it a user-owned internet, call it Web 3.0, call it whatever buzzword you want, but what we’re really talking about here is returning power to the people.  We’re moving to an internet where people matter again and you’re the center of the story, not companies. 

With Stacks, PoX is the foundation of that story.

In the most basic sense, PoX is a way to extend the power of Bitcoin beyond the silo of the Bitcoin network. It brings the properties that make true digital ownership possible to wherever developers need it. Before Bitcoin, the notion of owning any digital asset, even something as basic as money, was a pipe dream. The entire architecture of the Bitcoin network, including the P2P nature, elimination of middlemen, and overall transparency, is centered around the notion of digital ownership.  

PoX helps us unlock this power and push it beyond Bitcoin to reshape our digital lives. Without PoX, building new features on Bitcoin is a paradox. Bitcoin is secure because it’s stable and resistant to change. It’s secure because it has a very limited scripting language with a small attack surface, among other properties. Introducing new features to the Bitcoin core protocol is hard and not desirable as these features add complexity.

PoX solves exactly this. It is designed so that builders can benefit from Bitcoin’s properties without modifying Bitcoin itself. It also means builders can tap into the immense value stored on the Bitcoin network, activating cases for DeFi, NFTs, and more for all holders of BTC.

PoX is broken down much more deeply in the whitepaper, but basically, the PoX consensus mechanism allows a new project to create a new network with its own unique features that has the security of an existing Proof of Work blockchain from the beginning without the need to modify that existing chain. In the case of Stacks, core developers chose Bitcoin because it lets us leverage the security of the world’s most secure and most widely used blockchain, while delivering full support for token creation, smart contracts, light clients, unique funding mechanisms, and more. 

So how does Proof of Transfer actually work? To understand Stacks' Proof of Transfer implementation, you need to understand the two core mechanisms that power it: Mining & Stacking.

If we’ve converted electricity to mine a token already (PoW to mine Bitcoin, in this case), we can leverage that to secure a new chain rather than waste more electricity. This is the core insight that led to the idea of Proof of Transfer. Like other blockchains, the network is secured by miners who commit resources in order to compete to mine a Stacks block, and receive an STX reward. In the case of Stacks, it is Bitcoin, not electricity/computing power, that is input by miners for a chance to win new Stacks blocks. A nice added feature of this is that Stacks mining doesn’t require any special hardware or high upfront costs; anyone who wants to mine a block simply sends Bitcoin to the address provided by the protocol. The protocol uses the amount of Bitcoin sent by each miner as an input, and combines it with a verifiable random function (VRF) in order to run the leader election and select a winning miner. The more Bitcoin a miner commits, the higher their chances of winning the leader election.

Once a winning miner is selected, they are able to broadcast the new block they’ve created across the network, and the protocol rewards their effort by sending them a reward of 500 STX tokens.

But what happens to the Bitcoin that the miners have sent to the protocol? That’s where Stacking comes in. 

Essentially, Stacking is when STX token holders lock up their STX tokens on the network. This completes the economic cycle of Proof of Transfer as these 'Stackers are sent BTC from miners. Stacking adds value to the network in 3 ways: (1) signaling support for a chain tip requires getting information that is commonly provided by running a node and thus encourages further decentralization of the network, and (2) signaling support for a specific chain tip adds an extra incentive for STX Miners to be honest with how they mine (3) locking up STX adds value directly to the network, as more and more token holders are incentivized to put further skin in the game.

In exchange, the Proof of Transfer mechanism sends the Bitcoin committed by STX Miners each block to users who are Stacking. This is where the word “Transfer” comes from. The protocol takes the Bitcoin sent by miners in order to secure the network, and transfers it to users who are providing value to the network. Stacking runs in cycles lasting roughly 14 days, meaning every 14 days there is a new opportunity to participate in Stacking and earn BTC.

The below diagram gives a high-level representation of Proof of Transfer.

The end result of all this is that people are incentivized to hold the tokens so long as the service / network resource given back is worth it. If that changes, they can leave with their creations and connections intact. This model of digital ownership, freed from the silo of Bitcoin, is what will fix our broken internet and become the standard. It finally rewards power and value to the people that are responsible for making it what it is in the first place.

Well, you could say it’s an abstraction of Proof of Work, or a mining mechanism on the Stacks blockchain, or an extension of Bitcoin, or even a way to enable true digital ownership in any application or service, and you’d be right. 

But more than that, PoX is the pen that is helping us write a new story for the Internet, one written in Bitcoin’s gold ink with you as the hero. A reality where you’re a decision-maker, have freedom and rights, and are a participant in the value you create. A reality in which you, not big companies, own your digital identity and life.

PoX makes you the owner of tomorrow’s internet.