What is Proof of Work (PoW)? All you need to now

Proof of Work (PoW) is a consensus mechanism of the blockchain.

Such a mechanism is necessary because the blockchain protocol relies on an effective approach to decentralized exchange. If there are changes in the blockchain, these must be confirmed by a consensus mechanism in order to enable the system to work independently and reliably.

In the following article, we answer the following questions about Proof of Work:

  • What is Proof of Work?
  • How does PoW work?
  • What are the most famous proof of work coins?
  • What are the differences between Proof of Work and Proof of Stake?

What is Proof of Work (PoW)?

Proof of Work is a consensus mechanism on the blockchain.

In order to understand the function, it is necessary to go into the basics of blockchain and distributed ledger technology. The blockchain is a directory of information blocks or transactions. These are stored, building on each other, over a network. A release protocol is required to enable a decentralized transfer of data between the network participants.

The decentralized storage of data is probably the most important function of the blockchain.

After all, it ensures that network participants do not have to trust that the data is correct. Instead, the blockchain system ensures that the data is free of errors and tamper-proof.

Proof of Work starts here as follows: 

The blockchain allows data to be shared by a network of independent participants or users (nodes). Each node has an exact copy of the entire data volume on the blockchain at all times. In order to change a data record, the majority of the network participants must agree to the information being changed at the same time. Such a consent or consensus mechanism is Proof of Work.

How does the Proof of Work consensus algorithm work?

Proof of Work involves solving computationally intensive mathematical tasks in order to add new blocks or data sets to a blockchain. This process is also known as mining.

In order to be able to generate new blocks, a node has to solve the mentioned mathematical problem by trial and error. The first network participant to find a solution can share it in the network. Other participants can then build on the newly generated data block.

The more computational work a node does, the greater the likelihood that it will generate blocks.

The provision of PoW is time-consuming and resource-consuming, but other participants’ validation of the data is quick and uncomplicated.

The PoW process consists of the following steps:

  • In the mining process, the miner finds a result with certain properties through arithmetic operations.
  • This is based on transactions that are combined in a block.
  • The miner checks whether these transactions are correct by checking (“hashing”) the block. The miner uses the hash function, i.e. a mathematical function that creates a character string with a fixed length from a character string of undefined length. The difficulty here is to find a result with certain properties that result from the so-called hash function.
  • The first miner to find the solution receives the block and corresponding rewards (transaction fees). The validated transactions are attached to the blockchain in the new block.

The resources that are used for this process can be traced back to the operation of the computers on which the blockchain is stored (nodes). Estimates by bitnodes.io show that there are currently around 15,000 nodes for Bitcoin alone. However, the much larger share of the resources or energy is used to generate new blocks and confirm transactions.

Best Proof of Work coins for Staking

The PoW consensus mechanism is used for specific cryptocurrencies and ensures that the data on the blockchain is unanimous. The most popular PoW coins are described below.

Bitcoin (BTC)

Bitcoin takes the pioneering role at PoW, because the Bitcoin blockchain was the first to use PoW as a consensus mechanism. This was developed by Satoshi Nakamoto, the creator of Bitcoin, with the idea of ​​combining economic incentives with securing the integrity of the Bitcoin blockchain. In the Bitcoin blockchain, the participants have to solve cryptographic tasks in the sense of the PoW protocol in order to be able to propose new blocks for the blockchain. A detailed description of Bitcoin’s PoW mechanism can be found in Nakamoto’s whitepaper.

Ethereum (ETH)

Also, Ethereum set at the beginning of Proof of Work as a validation process in the blockchain. Participants made their computing power available for the decentralized blockchain in order to earn coins by successfully calculating the block. However, in this process, a lot of electricity is used – to a large extent, even for free. Because only the network participant who is the first to prepare the successful invoice forms a new block and receives coins. In this case, all the computing power of the other participants is free. Another bottleneck is the associated high transaction costs when running dApps.

For this reason, the project is changing from Proof of Work to Proof of Stake (PoS) as part of Ethereum 2.0. The network automatically votes on who should create the next block among the active network participants. Voting can occur according to different rules, for example, on the basis of the coin assets held by the respective participant. Compared to PoW, PoS only uses a fraction of the energy to maintain the blockchain.

Dogecoin (DOGE)

Dogecoin is a peer-to-peer cryptocurrency based on the doge internet phenomenon. Dogecoin is derived from the open-source project Litecoin. This is also a peer-to-peer cryptocurrency. Dogecoin uses a proof-of-work algorithm that is similar to that of Bitcoin. At Doge, too, miners calculate new blocks and use them to process outstanding transactions. A key difference to Bitcoin is the number of coins that can be generated. With Bitcoin, these are limited to a maximum of 21 million coins, while Dogecoin was originally limited to 100 billion coins.

Litecoin (LTC)

Litecoin was developed just after Bitcoin, making it one of the first altcoins. Litecoin is considered the “silver” of cryptocurrencies, while Bitcoin is considered digital gold. In principle, this was also the objective of developing Litecoin: finding a fast and inexpensive alternative to Bitcoin.

The development of Litecoin is based on a so-called “hard fork” of the Bitcoin blockchain. The opposite of this is the “soft fork”, in which the software protocol is changed and previously validated transactions or blocks are made invalid. This is done by a majority of the miners, who then perform the new upgrade and apply the new rules. On the other hand, a hard fork occurs when the code has been heavily modified so that the new version is no longer compatible with earlier blocks. In this case, the original blockchain is split up – in the specific case, and this split resulted in Litecoin.

Proof of Work vs. Proof of Stake

The difference between Proof of Stake and PoW is the way a transaction is validated on the blockchain. The validation of consensus mechanisms is carried out on the decentralized blockchain.

The differences between Proof of Work and Proof of Stake can be described as follows:

  • Proof of Work is based on mining. Network participants who solve a cryptographic task and thus validate transactions and generate new blocks receive a reward in the form of coins.
  • No mining is necessary with Proof of Stake. Instead, the cryptocurrency is generated by holding parts of it in a wallet and unlocking them. This process is known as Staking. As an incentive to generate new blocks, the network participants receive the transaction fees incurred per block as a reward.

Another significant difference is the energy consumption of the two mechanisms. This is much higher with PoW, which is why Ethereum, for example, is switching the protocol to PoS. According to a study by Cambridge University, Bitcoin’s energy consumption is 130 TWh per year. This is comparable to the annual energy consumption of countries like Argentina. The energy consumption of Ethereum is only 26 TWh per year.

Conclusion on the consensus algorithm PoW

PoW is a proven consensus algorithm used for cryptocurrencies such as Bitcoin or Ethereum. The Bitcoin algorithm is called SHA-256, the Ethereum algorithm is called Ethash. PoW ensures a tamper-proof blockchain, but the algorithm has some disadvantages. In particular, solving cryptographic tasks requires a great deal of time and energy and is therefore very cost-intensive. For this reason, many cryptocurrencies are now relying on Proof of Stake.

Frequently asked questions (FAQ) about Proof of Work

This section provides answers to the most important questions about Proof of Work.

What does mining mean in Proof of Work?

Proof of Work (PoW) is an algorithm that grants blockchain participants who solve a cryptographic task and thereby validate transactions and generate new blocks a reward in the form of coins. This process is called mining.

What are the advantages of Proof of Work?

Proof of Work is very resource-intensive, but the mechanism also offers advantages. The biggest advantage is that all miners receive the same pay. It is also not possible for participants to receive more coins than others through fraud. Invalid or non-validated transactions are not permitted so that the blockchain and the data stored on it are tamper-proof.

What are the disadvantages of Proof of Work?

Proof of Work is very time and energy-intensive. Solving the cryptographic tasks requires a lot of computing power and thus high power consumption. In addition, there is the possibility of a so-called 51 percent attack with PoW. This means that mining pools that generate greater than or equal to 51 percent of the mining performance can jeopardize the stability and security of the network.

Does Proof of Work Mining consume a lot of energy?

Proof of Work consumes far more energy than Proof of Stake because a lot of computing power is required to solve the computing tasks. This results in high power consumption.

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