proof-of-work

What Is A Proof of Work And Why It Matters In Business

A Proof of Work is a form of consensus algorithm used to achieve agreement across a distributed network. In a Proof of Work, miners compete to complete transactions on the network, by commuting hard mathematical problems (i.e. hashes functions) and as a result they get rewarded in coins.

Proof of Work in a nutshell

As Ethereum points out“in proof of work (PoW) based public blockchains (e.g. Bitcoin and the current implementation of Ethereum), the algorithm rewards participants who solve cryptographic puzzles in order to validate transactions and create new blocks (i.e. mining).”

Proof of Work explained in the original Bitcoin‘s White Paper:

The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work.

As the White Paper explains, the several steps to run the network are:

1)  New transactions are broadcast to all nodes.

2)  Each node collects new transactions into a block.

3)  Each node works on finding a difficult proof-of-work for its block.

4)  When a node finds a proof-of-work, it broadcasts the block to all nodes.

5)  Nodes accept the block only if all transactions in it are valid and not already spent.

6)  Nodes express their acceptance of the block by working on creating the next block in thechain, using the hash of the accepted block as the previous hash.

The longest chain wins. When new proof-of-work are found, and a branch becomes longer, all the other nodes converge into the lowest blocks.

Origin story of Bitcoin

January 10th, 2009, a guy named Satoshi Nakamoto (it was only a pseudonym) sent an email to Hal Finney, a man from Santa Barbara:

“Normally I would keep the symbols in, but they increased the size of the EXE from 6.5MB to 50MB so I just couldn’t justify not stripping them. I guess I made the wrong decision, at least for this early version. 

I’m kind of surprised there was a crash, I’ve tested heavily and haven’t had an outright exception for a while. Come to think of it; there isn’t even an exception print at the end of debug.log. I’ve been testing on XP SP2, maybe SP3 is something.

I’ve attached bitcoin.exe with symbols. (gcc symbols for gdb, if you’re using MSVC I can send you an MSVC build with symbols)

Thanks for your help!”

Source: online.wsj.com

The subject of the email was Crash in bitcoin 0.1.0. That man, Satoshi Nakamoto was explaining to Hal Finney how to use a Bitcoin.

Therefore, computers mining coins, solve harder and harder cryptographic puzzles, which work as a proof, thus making them rewarded with coins.

Proof of Work types

There are several types of Proof of Work. From hash functions to puzzles (cryptograms), sequences, hard inversions and many others. The key aspect here is in order for blocks to be validated computers mining to confirm transitions and produce new blocks. As those miners competing with each others, add blocks to the chain, as result they earn rewards (coins).

Distributed consensus

The whole point of Proof of Work, just like in the Proof of Stake is about enabling consensus in a distributed network.

Where Proof of Stake validates the network’s blocks based on proved stake of the validators.

In a Proof of Work, miners, pool up to generate coins for the network by solving harder and harder mathematical problems, and as a reward they get coins.

Advantages of Proof of Work

The original consensus algorithm in a Blockchain network was designed on proof-of-work. Thus, this, overall proved a solid consensus algorithm.

However, it has some drawbacks.

Drawbacks

Some of the drawbacks of proof of work are:

  • Mining monopolies” Indeed, as the proof-of-work based Blockchain protocol grows, the computing power needed to complete new blocks might require higher efficiency. Therefore, miners tend to pool up and the ones becoming bigger will also become the ones able to mine more blocks, and therefore get more rewards. Those rewards if invested further in mining equipment it makes them further mine larger and larger portions of the network, thus creating a sort of pool monopoly.
  • Reduced decentralization: Decentralization is the main reason for the Blockchain existence. However, as the proof-of-work-based Blockchain protocol grows, it also becomes more concentrated, and therefore centralized.
  • Security: Large mining pools could, at least in theory, launch a 51% attack to take over or cause chaos on the network.

Key takeaways

Proof of Work is among the consensus algorithms used on Blockchain protocols. It is perhaps the consensus algorithm used on the first cryptocurrency, the Bitcoin.

The Bitcoin still works with a Proof of Work consensus algorithm, where Ethereum, for instance, is transitioning toward Proof of Stake.

Cryptocurrencies are serving as incredible lab for those various consensus algorithms and all the other systems built on top of them to be tested, validated and determined whether they can work at larger and larger scale.

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Published by

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which target is to reach over two million business students, executives, and aspiring entrepreneurs in 2020 alone | He is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate | Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy | Visit The FourWeekMBA BizSchool | Or Get in touch with Gennaro here