Proof Of Work (PoW)

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10 Feb 2024

Proof of Work (often abbreviated as PoW) is a mechanism to prevent double spending . Many major cryptocurrencies use PoW as their consensus algorithm . Consensus algorithm is the name given to the method used to secure the ledger of cryptocurrency. Proof of Work was the first consensus algorithm introduced and remains the most widely used algorithm today. It was introduced by Satoshi Nakamoto in his Bitcoin white paper in 2008 , but the technology itself was created much earlier than that . Adam Back's HashCash is one of the first examples of Proof of Work algorithms of the pre-cryptocurrency days. By requiring senders to make a small calculation before sending an email, recipients can block spam mails. This calculation costs nothing for a standard user, but it makes things difficult for someone who sends emails in large groups.

What is double spending?

A double expenditure occurs when the same funds are spent more than once . The term is used almost exclusively in the context of digital money – after all, it is quite difficult to double-spend with physical coins. When you pay for a coffee, the cashier takes the money from you and locks it in the cash register. You cannot buy coffee again from another shop using the same money. You have the possibility to do this in digital money systems. You've probably copied a digital file before. To do this, simply copy and paste the file. You can send the same email to ten, twenty or even fifty people. Digital currencies are also just data, you need to prevent other people from copying the same units and spending them in different places. Otherwise the currency will collapse in a very short time.

Why is Proof of Work necessary?

If you've read our guide to blockchain technology , you know that users broadcast their transactions to the network. However, these transactions are not considered valid immediately. They are only considered valid once they are added to the blockchain. Blockchain is a large publicly visible database, so anyone can check whether funds have already been spent. You can think of it this way: You and three friends have a notebook. You write this transaction every time one of you wants to transfer the units you used – Alice paid Bob five units, Bob paid Carol five units , etc. There is another detail here. Every time you make a transaction, you reference the transaction from which the funds came. So if Bob is paying Carol with five units, the entry looks like this: Bob paid Carol with five units from his previous transaction with Alice . We now have a way to track units. If Bob tries to do something else with the units he just sent to Carol, everyone will notice immediately. The group does not allow the transaction to be added to the notebook. This process can work quite well in a small group. Everyone knows each other, so they can probably agree on who gets to add transactions to the notebook. But what if this group consists of 10,000 participants? The notebook idea fails at scale because no one wants to trust a stranger to manage records. This is where Proof of Work comes into play. It ensures that users do not spend funds that they do not have the right to spend. A PoW algorithm uses a combination of game theory and cryptography, allowing anyone to update the blockchain within the rules of the system.

How does PoW work?

Our notebook above is blockchain. Transactions are made into blocks rather than added one by one. Transactions are reported to the network, and users who create blocks then include those transactions in a candidate block . Transactions are considered valid only after the candidate block becomes a confirmed block, that is, it is added to the blockchain. But adding a block isn't cheap. Proof of Work requires a miner (the user creating a block) to commit some of their own resources for this privilege. This resource is computing power and is used to hash block data until we find a solution to the puzzle . Hashing block data means passing the data through a hash function to create a block hash. The block hash works like a “fingerprint,” meaning it acts as an ID for your data entry and is unique for each block. It is almost impossible to obtain the data entry by reversing the block hash. However, if the input is known, it is very easy to check whether the hash is correct. You just need to insert the data into the function and see if the output is the same. In Proof of Work, the hash of the data you submit must meet certain conditions. But it is not possible to know in advance how you will obtain this value. Your only option is to pass the data through a hash function and check if the hash satisfies the conditions. If it does not meet the conditions, you need to make a small change to the data to get a different hash.

Changing even a single character in your data will give a completely different result, so it's impossible to predict what the output will be. As a result, if you want to create a block, you have to play a guessing game. Usually you take all the transactions you want to include and some other important data and hash them all together. But since your data set cannot change, another piece of information that can change must be added. Otherwise, you will always get the same hash as output. This variable data is called nonce . You can change this number each time you try, so you can get a different hash each time. And this whole process is called mining . In summary, mining is a process that consists of gathering blockchain data and hashing the data by adding a nonce until it finds a specific hash value. Once you find a hash that meets the conditions set by the protocol, you have the right to announce the new block to the network. At this point, other participants in the network update their blockchains to add the new block. It is extremely difficult to meet the conditions for major cryptocurrencies today. The higher the hash rate on a network , the more difficult it is to find a valid hash. This feature prevents blocks from being found too quickly. As you can imagine, guessing a large number of hashes can be costly for your computer. You spend large amounts of calculation cycles and electricity. But if you find a valid hash, the protocol rewards you with cryptocurrency .

Let's go over what we've learned so far:

Mining is expensive.
If you can produce a valid block you will be rewarded.
If a user knows an entry, they can easily check the hash of the entry – non-mining users can verify whether a block is valid without expending too much computing power.

Comparison of Proof of Work and Proof of Stake

There are many different consensus algorithms, but one of the most notable is Proof of Stake (PoS). The concept dates back to 2011 and has been implemented by some smaller protocols. But it has not yet been used by major blockchains. In Proof of Stake systems, there are validators instead of miners . There is no mining and no race to guess the hash. Instead, users are randomly selected and the selected user must submit (“create”) a block. If the block is valid, the user receives a reward consisting of transaction fees paid for the transactions included in the block. But not all users are eligible to be selected as validators. The protocol makes the selection taking into account certain factors. To be eligible, users must have locked a stake , a predetermined amount of the blockchain's native currency. Staking works like bail: just as defendants are forced to pay large sums of money to deter them from missing hearings, validators are forced to lock up a certain amount of funds (stake) to prevent them from cheating. If validators act dishonestly, the locked funds (or part of the funds) will be removed.

Proof of Stake has some advantages over Proof of Work. Its most notable advantage is that it has a smaller carbon footprint. This is because there is no need for high-power mining farms in PoS and the amount of electricity consumed is much lower than that consumed in PoW. However, PoS does not have as extensive a history as PoW. Although mining is considered very wasteful, it is the only consensus algorithm that has proven itself on a large scale. It has secured transactions worth trillions of dollars in just over a decade. In order to say with certainty that PoS can rival PoW in terms of security, this algorithm must first be tested on a large scale.

Proof of Work is the original solution to the double-spending problem and has proven to be safe and reliable over the years. Bitcoin has proven that there is no need for centralized units to prevent the same funds from being spent twice. With clever use of cryptography, hash functions , and game theory, participants in decentralized circles can reach consensus on the state of a financial database.

Advantages of Proof of Work

PoW is a mechanism used by some blockchain networks to achieve distributed consensus. It has significant advantages including:

Security: PoW provides security for the network as an attacker must spend a significant amount of computing resources to control the majority of the network's mining power, known as a 51% attack.
Decentralization: By requiring miners to compete against each other to solve complex mathematical puzzles, PoW distributes power among the participants of the network, making it difficult for the network to be controlled by any one person or organization.
Incentive: PoW encourages miners to contribute their computational resources to the network by rewarding miners with newly minted coins when they successfully solve a puzzle. This helps ensure that the network remains secure and decentralized.

Disadvantages of Proof of Work

Proof of Work (PoW) is a widely used algorithm in the world of cryptocurrencies. It has several disadvantages, including:

Energy consumption: PoW is a highly energy-intensive process as it requires a lot of computing power to solve complex mathematical problems and verify transactions. This can lead to a significant increase in energy consumption, which can be harmful to the environment.
Time: The process of solving math problems in mining or PoW can be time consuming. This can slow down the overall speed and efficiency of the blockchain network.
Expensive hardware and electricity costs: In order for individuals and organizations to participate in PoW, they must invest in expensive hardware and pay high electricity costs. This can make it difficult for smaller players to join the network and lead to centralization.
Potential for centralization: Because mining requires a lot of computing power, it can be difficult for small players to compete with large, well-funded organizations. This could lead to centralization of the network, with a small number of entities owning the majority of the mining power. This could compromise the security and decentralization of the network.

3 Areas Where Proof of Work is Used

- Cryptocurrencies: PoW is used by many popular cryptocurrencies such as Bitcoin and Ethereum as a way to secure and verify transactions on their networks. In these systems, miners compete to solve complex mathematical problems to verify transactions and earn rewards.
2- Smart contracts: PoW can also be used with smart contracts, which are self-executing contracts where the terms of the agreement between the buyer and seller are written directly in lines of code. PoW can help ensure the security and integrity of these contracts.
3- Voting systems: PoW can also be used in voting systems as a way to ensure the integrity and security of voting. In these systems, voters can use their computing power to help verify and secure the voting process, ensuring the results are accurate.