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October 3, 2022
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Bitcoin

– Bitcoin, cryptocurrencies and blockchain technology.

Proof-of-work (PoW) is an algorithm that secures many cryptocurrencies, including Bitcoin and Ethereum. Most digital currencies have a central unit that tracks each user and the amount of money they have. However, this is not the case with Bitcoin. Proof-of-work is a mechanism that is necessary for the cryptocurrency to operate without the participation of any intermediary (e.g. bank, government).

More specifically, proof-of-work solves the “problem of double issuing”. If users are allowed to double spend their coins, it increases the overall supply, destroying all other coins and rendering them worthless. Double spending is a problem in online transactions. Digital activities are very easy to recreate, which makes it easy to copy and paste a file or send an email to more than one person.

Proof of work makes it very, very difficult to double your digital money. There must be “evidence” that someone has done a considerable amount of computation.

How does proof-of-work work?

Bitcoin is a blockchain – a shared ledger containing a history of every transaction that has ever taken place. Blockchain, as the name suggests, is made up of blocks. Each block contains the most recent transactions that have been recorded in it.

Proof of work is an essential part of the process of adding new blocks to the Bitcoin chain. The blocks are mined by miners, ie ecosystem participants who perform “Proof-of-work”. The new block is accepted by the network each time the miner presents a new winning proof of work. This happens approximately every 10 minutes.

Finding the winning proof is so difficult that the only way to get miners the job they need to earn bitcoin is through expensive, specialized computers. Miners get Bitcoin if they guess the matching calculations. The more calculations, the more Bitcoins the miner receives.

What exactly are the calculations made by miners? With BTC, miners produce a so-called “hash” that turns the input data into a random-looking string of letters and numbers.

The goal of miners is to create a hash that matches Bitcoin’s current “purpose”. They need to create a hash with enough zeros in front. The probability of getting several zeros in a row is very small. However, miners around the world do trillions of such calculations per second, so it takes about 10 minutes on average to do so.

Whoever reaches the goal first will receive the cryptocurrency. The Bitcoin protocol then creates a new value that miners have to hash, and the miners start the race all over again.

Why do miners follow the rules?

Miners earn BTC rewards for each block they find a solution for. This is what drives them to mining in the first place. This award also forces them to follow the rules – not, for example, to spend money twice. Let’s say Tom finds the winning hash for the block. If Tom presents proof of work but breaks the rules within the block – let’s say he spends the money more than once – the rest of the BTC network will reject his block. Tom will lose all the BTC he should have received. The risk of losing the prize keeps the miners honest.

Why is proof-of-work needed?

The purpose of proof-of-work is to prevent users from issuing extra coins they haven’t earned or from double spending. If they were able to spend their coins more than once, the currency would become worthless.

In most digital currencies, this problem is easy to solve. The bank that is responsible for the system keeps track of how much money each person has. If Alice sends Tom a dollar, then the bank subtracts the dollar from Alice and adds $ 1 to Tom. In the case of cryptocurrencies, however, there is no entity such as a bank. The solution is proof-of-work, i.e. presenting proof of work.

Who Invented the Proof-of-Work?

The proof-of-work algorithm was invented by the creator of Bitcoin – Stoshi Nakamoto. Nobody knows who Nakamoto is or whether this data is just a pseudonym.

What problems does proof-of-work face?

Proof-of-work isn’t perfect. There are at least a few problems this algorithm grapples with.

High energy consumption: Bitcoin, due to proof-of-work, consumes the same energy as the whole of Switzerland. Energy consumption is increasing all the time as more and more miners join the grid. However, an increasing number of them supply their mines with renewable energy.

Attack 51%: If a single mining entity is able to accumulate 51% of the hashrate, it can then temporarily break the rules by spending double money and blocking transactions.

Centralization of mining: The goal of proof-of-work is to create a currency without a single entity to manage it. In practice, however, the system is somewhat centralized. Only three mining pools control almost 50% of Bitcoin’s computing power. However, developers are trying to alleviate this problem.

Why does more mining power mean more security?

The more computing power is delivered to the Bitcoin network, the more resources a potential attacker needs to accumulate to successfully launch a 51% attack.

Which cryptocurrencies are proof-of-work?

Most cryptocurrencies use proof-of-work, although some are experimenting with other ways to secure the network. The most popular cryptocurrencies that use the proof of work algorithm are:

  • Bitcoin
  • Ethereum (though Ethereum has recently started the transition to Ethereum 2.0 – an update that will move the cryptocurrency to potentially greener proof-of-stake).
  • Bitcoin Cash
  • Litecoin
  • Monero

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