When analyzing modern blockchain networks, the word ‘Proof of Work’ is often encountered. In fact, we find the first mention of a PoW consensus mechanism within the original Bitcoin whitepaper created by Satoshi Nakamoto. But what is PoW and why is this consensus mechanism crucial for blockchain technology?
Proof of Work represents the foundational material that guides transactions, users, and miners within a public digital ledger. The system successfully ensures the timely continuation of all transactions within a network in order to avoid various kinds of malicious activities.
Sounds complex? No worries! We have written an explanation for Proof of Work in an easily digestible form. In the following sections, we will take a look at each activity and motivation that stands behind PoW networks.
Proof of work represents a system that, through sheer processing power, deters any malicious activity that can potentially damage the network’s stability. This concept was first introduced in 2004 by Hall Finney who created the idea of ‘reusable proof of work.’ At the time, PoW’s main idea was to prevent spam emails and DDOS attacks.
Five years later, Bitcoin’s anonymous creator Satoshi Nakamoto implemented Finney’s idea into the world’s first blockchain network. Much like its predecessor, blockchain-based PoW also prevents malicious activity. But apart from that, it is also the driving force that makes transactions functional in a decentralized and immutable ledger.
PoW is the main system in blockchain networks that processes transactions by providing them with hashes and confirming them. The system itself is supported by miners who participate in the network by verifying new transactions for a monetary reward - in this instance Bitcoin.
Therefore, we can think of PoW as a layout that both miners and users follow when interacting with a blockchain network.
The specific malicious activity that Proof of Work prevents is called double-spending. On blockchain networks, all transactions are backed by a digital token that represents a certain monetary value.
If you were to send $50 to a friend through the Bitcoin network, you would need to send X amounts of BTC.
But how do we know that this coin was not already used to pay for another service or product? Without PoW, a network cannot accurately verify that a user did not double-spend tokens. As such, it makes blockchain technology useless and incompatible with any of its original purposes.
One could solve this issue easily by introducing a central authority that verifies transactions and ensures that coins are not spent twice. But while it is easy to do so, it does not help with bringing decentralization. Why even bother with using blockchain networks when they work in the same way that a bank does?
Satoshi Nakamoto fixed the problem of double-spending by requiring all network participants to have access to the ledger’s entire history of transactions. By knowing every single transaction in the history of a blockchain network, it is impossible to miss if certain tokens were already used.
Therefore, Nakamoto thought of having the transactions publicly announced. With that possibility, all of the network’s users could agree to a single transaction history based on the order in which they were received and sent.
Since time is linear, it is the best tool that can tell us in which way transactions are ordered. By stamping the time of when a payment was created onto a transaction, we know its position in the overall ledger. Thus, we have timestamping!
In the original Bitcoin network, a timestamp server is used to assign the time of a transaction’s creation. The server merely takes the hash of a block, which contains numerous transactions, and timestamps it. Then, the hash of that block is publicly announced.
One key component of this process is that the timestamp server includes the previous timestamp of a block in its current hash. By doing so, the server forms an unbreakable chain in which each timestamp reinforces the stability, legitimacy, and validity of the network.
The version of timestamp servers that we have in blockchain networks is what we refer to as Proof of Work consensus systems. It works similarly to a normal timestamp server, except that it is decentralized and requires no central authority.
PoW utilizes the cryptographic hashing function called SHA-256. The network itself uses a nonce for each transaction in order to create different hashes every time, otherwise, it would constantly produce the exact hash at all times.
All of these processes are supported by the act of mining, a process through which blockchain nodes solve complex ‘mathematical’ problems to verify and confirm transactions. After completing their task, the network grants a certain portion of a block mining rewards to the node, based on his personal contribution to the network.
On that account, each node receives rewards proportionally to the amount of hardware power invested in the network. The more processing power one uses to support the Bitcoin network, the higher the number of coins he receives.
That is why we have gigantic mining farms all around the world, filled with thousands of graphics cards whose processing power is used to verify transactions and mine BTC.
To better understand how Proof of Work functions, let us briefly summarize the entire process. After all, repetition is the mother of skill, and with the concepts explained so far we have learned a lot of information in an incredibly short time.
When talking about blockchain networks, we think of a digital ledger that is public, decentralized, and distributed to all parties. If you send or receive a payment from someone, the transaction is eternally recorded into the network.
Each individual transaction is piled up into a block that can carry thousands of transactions at any given time. Once the block is ready to verify all of these transactions, miners will perform incredibly laborious jobs to confirm the block. Upon confirmation, it will be forever recorded in the network without any chance for someone to disrupt or edit the information recorded.
Proof of Work is crucial for this process because it prevents information tampering. This is done by timestamping each transaction and block based on the time and order that it was created or verified. The process of verification is conducted through a hash, a long string of numbers.
Hashes are used to confirm that the received data matches the original data. In this case, the original data refers to all the past transactions confirmed on a network. If a block is not in line with the previous blocks and the hashes do not match, then miners cannot verify the transactions.
Now that we have summarized what hashing and timestamping is, let us take a better look at the act of mining. If a computer were to simply generate and confirm hashes, we would end up doing a job that can be completed in mere seconds. To prevent that from happening, we need to put the work in Proof of Work.
All blockchain networks set a certain level of difficulty that makes mining laborious. After each block is mined, approximately every 10 minutes, the difficulty is adjusted. The difficulty is set by the network itself, which establishes a sort of target for the hash. The higher the target the more difficult it is to mine an entire block.
As we previously mentioned, miners use nonces when hashing. These nonces represent an integer (a number used once) that makes it possible for miners to generate a hash that is below the target difficulty. Onc miners discover a valid hash, it is shared with the entire network and the transaction block is added to the blockchain network.
Besides Proof of Work, there is another consensus mechanism called Proof of Stake. Developers are currently fighting over which mechanism is better for blockchain networks, as each model offers different pros and cons.
If you have heard about Proof of Stake (PoS), then you have most likely heard of Ethereum 2.0 as well. To make their network more efficient, scalable, and cost-efficient, developers have decided to create a new network for Ethereum based on PoS.
While the PoS concept dates back to 2011, it is only being implemented now. If successful, Ethereum may become one of the first larger implementations of Proof of Stake. But what is PoS and how is it different compared to PoW?
Essentially, the difference lies in the fact of who supports the network. Instead of miners, PoS utilizes validators. The new network is completely different from PoW as it requires no mining and there is no need to predict hashes.
On Proof of Stake, the network randomly selects a user who must propose a block. If the block is valid, he receives the reward which consists of the block’s transaction fees. With that in mind, we can conclude that a validator earns more as transaction fees increase.
PoS selects the user based on multiple factors which decide whether he will be the one to submit a block. First, a user must stake tokens in order to become a validator.
What is staking? The act of locking up the network’s native tokens. Essentially staking is the process of providing collateral in order to be eligible for becoming a network participant. In the case of Ethereum 2.0, a user must deposit 32 ETH.
Why is staking so important and why must users ‘pay’ to validate the network? Because it is the method used to incentivize honesty and disincentivize cheating. If a validator does not perform well or behaves maliciously, the network will take the validator’s stake.
Since Ethereum is moving from PoW to PoS, there must certainly be a motivation for why the developers are now migrating. Does it mean that PoS is better than PoW and if so, why?
As you may have already guessed, PoS eliminates the hardware power required to verify transactions. As a result, the mechanism is more environment-friendly and reduces the costs of running a mining farm. Bitcoin farms consume a lot of electricity and some experts believe it to be a hindrance as it contributes to world pollution.
In the case of Ethereum 2.0, developers have also moved onto PoS for one more reason. According to creator Vitalik Buterin, Proof of Stake will make the network more decentralized and more secure. Moreover, the consensus mechanism will also help with decreasing fees and making Ethereum more scalable for its users.
So far, Bitcoin with its Proof of Work design is the only network that has successfully proven that it can work on a massive scale. What Ethereum may do with a PoS network is still to be seen, as we have no confirmations of whether the new design will actually work or improve the network.
One more problem with Proof of Stake is that these networks are less secure compared to PoW. Without the security brought on by miners, it may be easier to manipulate or even attack PoS blockchain networks.
With the aforementioned facts in mind, all we can do is wait and see how Ethereum 2.0 performs. If it outpaces Bitcoin in terms of scalability, then we can consider PoS certainly to be a better option. If not, PoW remains the king of blockchain networks.
Proof of Work is a consensus mechanism utilized to fight against double-spending, a problem that enables users to spend the same cryptocurrency more than once. Satoshi Nakamoto implemented PoW into Bitcoin through numerous processes, including mining, hashing, and timestamping.
All of these processes combined allow the Bitcoin ledger to remain decentralized, distributed, and public. Apart from PoW, we also have a new consensus mechanism called Proof of Stake which completely leaves out the notion of mining.
Is PoS better than PoW? In theory, yes. However, it still has to be proved in practice through a large blockchain network that serves thousands of users. Ethereum 2.0 is the first serious attempt that developers are making. Whether the project is successful in utilizing PoS is yet to be seen. Until then, PoW remains the superior form of organizing blockchain networks.