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What is Proof of Work?

Last updated 30th Nov 2022
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Proof of work is a consensus mechanism that helps in maintaining the integrity of a blockchain network by allowing the execution and recording of genuine transactions. The miners also known as nodes work collectively without relying on a central authority to govern the network and get rewarded in return for their contribution to keeping the network secure and reliable.

Introducing Proof of Work

Proof of work was introduced with the launch of the very first cryptocurrency, Bitcoin, and it is still in use by many prominent blockchain networks. It is a creative solution to allow every participant in a network (nodes) to collectively authenticate the entries to the distributed ledger. This way, the network can autonomously govern itself and do the trust-building for its participants.

This guide explains how proof of work works, its advantages and limitations, and its future.

What is a Consensus Mechanism?

In a nutshell, a consensus mechanism help govern an autonomous network such as a blockchain. It is a collection of ideas, incentive mechanisms, and protocols that help realize it. In a centralized network, a governing entity is responsible for recordkeeping: it is responsible for keeping the database updated, and each entry is genuine and securely protected.

A bank, for example, keeps a ledger of every transaction its clients make, a log of each client’s account(s), and more. Account owners trust the banks in authenticating and facilitating their transfers, which would include communicating with their beneficiary’s bank, ensuring that the sender has enough funds in their account for the transfer, or that they will receive the transfer amount in full — after deducting the transfer fees for its services.

A decentralized network, on the other hand, does all this work through nodal participation and as said before, makes use of certain protocols to ensure transactions’ security and authenticity. They constitute a transparent system of management where every participant shares the responsibility of keeping the integrity and security of the network.

How Does It Work?

In a blockchain, every piece of information is stored in blocks, and each block is tied to one another in chronological order and is cryptographically sealed through hashing encryption. Each block has a limited capacity, and a new block needs to be added to the chain when one of the blocks is filled, this process is called mining. There is no defined selection for validators, any node is allowed to mine blocks as they wish.

Besides the data, each block includes its own and the previous block’s hash code: a series of alphanumerical characters that are created through the data input. For miners to authenticate each block, and by extension the transactions in them, they need to generate a valid hash code.

For modern computers, it’s fairly easy to generate any hash. To put the work in proof of work, networks like Bitcoin impose a “target” hash, and the hash the nodes generate must meet the target hash.

To do so, the validators generate the hash code functions as proof of the work by using a tremendous amount of computational power (via GPUs) while allowing other nodes to recognize the authenticity of the verification. For their honest contribution, the nodes are awarded an amount of the blockchain’s native coin.

What Is Wrong With Proof of Work?

While PoW brings about a creative solution to managing the network in a collective fashion, it has some major drawbacks which even led some prominent blockchains, most notably Ethereum, to switch to other consensus mechanisms.

Risk of Re-Centralization

PoW is a competitive consensus model, as everybody is free to do the validating job to collect the rewards. Over time, this has led participants to build mining farms, which are filled with associated hardware including dozens of GPUs, power supplies, and cooling mechanisms.

Miners also join powers to create mining pools, which would increase their chances of mining blocks and collecting tokens in return. This not only creates an unequal playground but also threatens the decentralization of a blockchain — a phenomenon called the 51% attack is fairly easy to occur in such situations.

For transactions to be authenticated, each verification needs the approval of at least half of the network’s participants. The growing size of the mining pools is paving the way for certain entities to take over most of the network: in the case of Bitcoin, for example, major mining pools like F2Pool and AntPool own over 14% of the network each. In theory, five of the major pools can join forces to own more than half of the Bitcoin network and may manipulate it.

Massive Energy Demand

As said before, the proof of the authenticating work in this mechanism comes from the high GPUs the nodes are using. This work not only drives the energy bills of the validators, which they are technically compensated for through economic incentives but creates an environmental problem.

According to Cambridge University’s most recent calculations, the Bitcoin network has released 200 million tonnes of carbon dioxide into the atmosphere, which is more than what Colombia produced in 2018. This raises serious concerns regarding the sustainability of blockchain networks relying on PoW and requires urgent solutions.

The rising energy prices in 2022 coupled with the tank in overall cryptocurrency value also made mining far less profitable than before, proving that real-life situations as such may threaten the whole mechanism.

Will PoW Stick Around?

The future of the PoW mechanism is unclear. As of September 2022, Ethereum has switched to the proof of stake mechanism, which requires much less computational power and allows the selection of validators with respect to the stakes they put forward. While it has its own drawbacks, it brings solutions to major problems associated with PoW.

Having a consensus mechanism is instrumental in keeping blockchains decentralized and secure. The current situation is far from grim as developers have been hard at work coming up with different solutions to address the problems of PoW and help networks grow.

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Idil Woodall

Idil Woodall

Idil is a writer with interests ranging from crypto and politics to fintech and media. She spent several years in publishing before becoming a full-time writer in the technology space, and learning the inner workings of an industry she loved ignited her interest in economics. As an English graduate, she cultivated valuable research and storytelling abilities that she now applies to make complex matters accessible and understandable to many. When she’s not writing, she can be found climbing or watching a movie.