PoW (Proof of Work) is a form of consensus algorithm that is extensively used by cryptocurrencies, such as Bitcoin, to validate the transactions that occur within their networks. Such networks are developed on Blockchain technology.
In Proof of Work, miners compete with each other to complete all the transactions on the network by solving difficult mathematical problems. In return, they get paid in crypto coins.
Blockchain transactions are validated by a network of individual PCs with a cryptographic protocol to evaluate the efficiency and accuracy of the data stored on the ledger.
The actual innovation behind Bitcoin and other cryptocurrencies lies in the integration of these technologies:
- A decentralized ledger system,
- Proof of Work, and
- Cryptographic keys.
Understanding Proof of Work
Proof of Work (PoW) came into existence in 1993 when Cynthia Dwork and Moni Naor published a Scientific paper. In the paper, they came up with this new technique of tackling spam emails that are delivered by using computer power for each and every transaction.
The proof of work is a function that is difficult to calculate but quite easy to check. The function has a message, a recipient address, and other criteria. Dwork and Naor called it the pricing function. Today’s personal computers can mail several email messages every single day, which creates a massive challenge in it.
This protocol didn’t become that popular until Satoshi Nakamoto came up with a Bitcoin wallpaper. Indeed, proof of work was the most innovative idea. With that, Satoshi came up with the idea of leveraging proof of work for enabling distributed consensus.
How Does it Work?
The highly popular crypto i.e. Bitcoin is using the Hashcash proof of work system. Miners need to complete proof of work to validate transactions in a block. Also, there is a lesser probability of block generation. So, it’s uncertain which employee in the blockchain network will create another block.
In a blockchain network, users receive and send coins to other users and the ledger combines transactions into blocks. However, it is essential to keep all the transactions in the right order and verify the same.
The way nodes authorize blockchain transactions totally depends upon the consensus algorithm. It does not have to be proof of work. To sum it up, PoW ensures security and consensus all across the blockchain network.
Why is Proof of Work Important?
Proof of work is significant as it adds trust to an unreliable environment. When mining professionals decide to fight for the reward for getting the upcoming block right, they agree to accept the rules of the community of nodes. They don’t indulge in manipulating the blockchain for its own requirements.
By amplifying the hurdles of validating each and every block, the proof of work protocol makes sure a surplus of mining does not occur. It keeps the supply of cryptocurrencies intact while rewarding miners every now and then to keep the system working smoothly.
Also, because it consumes fewer resources, like energy, time, and computing power, proof of work is not really secure and scalable. This gives rise to confusion and dilemma. The best alternative to deal with the inefficiency of resources is the Proof of Stake (PoS) consensus mechanism.
In Proof of Stake, the network gives more value to investing in cryptocurrencies as compared to computing power. Because every time a fresh block is built, the miner has to trade in old units of cryptocurrency for the latest ones, the miner won’t be in a stronger position to make the next block.
This assures a turnover in which miners will get the opportunity to mine the blocks, at the same time, rewarding the reliability of that cryptocurrency by making the crypto holders an important part of the whole process of mining.
Drawbacks of PoW
Proof of Work is definitely a great consensus algorithm, but it has its own disadvantages too. It’s not made perfect. To implement the proof of work correctly, you literally have to spend a huge amount of computing power and electricity to perform brute force hashes.
In fact, the power which is used for proof of work is totally a waste of resources. Just think if any cryptocurrency that uses proof of concepts, such as Bitcoin or Ethereum, goes to mainstream acceptance. How much power will be used to keep the blockchain network running effectively?
Another issue is centralization and mining pools. A person who just mines using one CPU won’t stand a good chance for bagging the reward. However, an individual who has a mining pool with hundreds of CPUs will have a better chance to get the reward.
As of now, around 50% of Bitcoin hash power is emerging from some mining pools, which means only a few people need to meet at a similar desk to agree on 51% of the attack and changing the blockchain altogether if they have any valid reason.
This, in turn, helps to create a centralized proof of work while it does not really go with the concept of decentralization. In addition, it is essential to know that 70% of the mining power comes from China. Mining pools have become centralized as the electric power cost varies from country to country.
But, PoW is Still Essential
For any proof of work system, you need to be sure that half of the mining participants have good intent. Why is proof of work important?
In a blockchain network, there is a chain with blocks on which you can create a new block once it has been verified. The community of Bitcoin claims that the longest chain will be the ideal one as a lot of work has gone into making that chain big.
Also, we are aware that blockchain is a distributed ledger system and the participants don’t know who is going to be the validator. So, now we can say that the longest chain of blocks has the network consensus.
One important consideration is that miners are validators, so if anything bad happens, it can only be possible with the help of miners. This shows that the blockchain network has all the reasons to stay accurate and trustworthy.
There is definitely no dearth of consensus algorithms, but proof of work is the most recommended one for Bitcoin and other cryptos. There are some more great solutions like proof of stake that claim to be more efficient than the proof of work. It, however, has its own issues to be dealt with.