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.

Aspect	Explanation
Definition	“Proof of Work” (PoW) is a consensus mechanism used in blockchain networks to validate and secure transactions and create new blocks. In PoW, participants known as miners use computational power to solve complex mathematical puzzles, known as “proof of work,” to add new blocks to the blockchain. This mechanism is resource-intensive and requires miners to compete to find the solution. Once a miner successfully finds a solution, they propose a new block, and the network verifies and adds it to the blockchain. PoW is known for its security but is energy-intensive.
Key Concepts	– Mining: Participants, called miners, use computational power to solve puzzles and propose new blocks. – Difficulty: The difficulty of the puzzles adjusts dynamically to ensure a consistent block creation rate. – Proof of Work: Miners provide computational proof of their work by finding a solution to the puzzle. – Consensus: The network reaches consensus when the majority of miners agree on a valid block. – Energy Consumption: PoW requires substantial energy due to computational competition.
Characteristics	– Energy-Intensive: PoW mining consumes significant computational power and electricity. – Security: PoW is highly secure due to the computational effort required to tamper with the blockchain. – Decentralization: It aims to prevent a single entity from controlling the network. – Trustless: Participants don’t need to trust each other; they trust the mathematical process. – Mining Competition: Miners compete to solve puzzles and propose new blocks. – Block Rewards: Miners are rewarded with cryptocurrency for their work.
Implications	– Energy Consumption: PoW is criticized for its high energy consumption and environmental impact. – Security: It provides strong security against attacks due to the computational effort required. – Decentralization: PoW aims to distribute mining power, reducing centralization risks. – Trustlessness: Participants can trust the blockchain’s integrity without relying on a central authority. – Competition: Mining competition can lead to significant computational expenses. – Reward System: Miners are incentivized to maintain the network through block rewards and transaction fees.
Advantages	– Security: PoW is highly secure against tampering and attacks. – Decentralization: It aims to prevent concentration of power in the network. – Proven Reliability: PoW has been used successfully in Bitcoin for over a decade. – Trustlessness: Participants can rely on the blockchain’s mathematical integrity. – Incentives: Miners are rewarded for maintaining the network.
Drawbacks	– Energy Consumption: PoW is criticized for its environmental impact and energy use. – Centralization Risks: There’s a risk of mining power becoming concentrated in the hands of a few. – Competition Costs: Mining requires expensive hardware and electricity. – Scalability: PoW blockchains may face scalability challenges. – 51% Attacks: In theory, a miner or group of miners with 51% of the network’s computational power could control the blockchain.
Applications	PoW is widely used in various cryptocurrencies, including: – Bitcoin (BTC): The first and most well-known cryptocurrency using PoW. – Ethereum (ETH): While transitioning to PoS, Ethereum has used PoW extensively. – Litecoin (LTC): A PoW-based cryptocurrency known for faster block generation. – Bitcoin Cash (BCH): A fork of Bitcoin, also using PoW. – Monero (XMR): A privacy-focused cryptocurrency utilizing PoW. – Zcash (ZEC): Known for enhanced privacy features, also employing PoW.
Use Cases	– Secure Transactions: PoW ensures secure and tamper-resistant transactions within blockchain networks. – Store of Value: Cryptocurrencies like Bitcoin serve as digital stores of value. – Mining Pools: Miners often join mining pools to combine computational power and share rewards. – Decentralized Finance (DeFi): PoW-based cryptocurrencies are used in DeFi applications. – Smart Contracts: Ethereum, transitioning to PoS, used PoW for smart contract execution. – Digital Gold: Bitcoin is often referred to as “digital gold” due to its scarcity and security.

Table of Contents

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.