Understanding Proof of Work
We all know someone who decided to invest in mining equipment. When you first heard about it, you most likely didn’t quite understand what mining is or why it needs that much power. What’s more, you were probably surprised that person knew so much about hardware and crypto… But is it a hidden talent, or is it something anyone can do?
Over the past several years, so many people (usually millennials) decided to give up college and turn to mining, or opened their first business thanks to mining, or sold their crypto and went on a trip around South America. And these are only the people I know; I can only imagine how many amazing stories are out there.
But if you wanted to ask them about their experience, to explain it simply, there was always a vague or sketchy vibe around it, leaving you with the impression that even they don’t know what it’s all about. And that’s completely okay. Blockchain has been around for over a decade, but we’re all still learning about its potential.
What does Proof of Work Mean?
So, let’s start from the basics. First, we need to explain these two terms briefly:
- Mining – Process of generating new crypto coins and verifying transactions.
- Miners – Individuals equipped with hardware and software for mining.
Now, we know miners are not doing private business but are connected to a major network, each contributing to the same chain. It’s hard to tell, but according to the data on the topic, there are more than a million miners worldwide.
Based on their IP addresses, these were the countries with the most miners in January 2022:
- 37.84% USA
- 21.11% China
- 13.22% Kazakhstan
- 6.48% Canada
- 4.66% Russia
- 3.06% Germany
- 2.51% Malaysia
- 1.97% Ireland
- 0.12% Iran
- 9.02% Other
Interesting fact: The landscape has significantly changed over the past few years. For example, in 2019, ¾ of miners were from China.
Considering the numbers above, it’s understandable why the mining process needs to be optimized and fault-free. For that to happen, miners need to be aware of how important it is to be honest, responsible and precise. To provide 100% accuracy, there’s no room for (human) error, and that’s why blockchain is the optimal solution.
But even so, miners need to prove somehow the quality of their work and the hardware power they can provide. And that’s where Proof of Work logic comes in.
What is Reusable Proof of Work?
The concept of Proof of Work was invented in 1993 by Moni Naor and Cynthia Dwork as a way to fight spam emails. Only later, in 2004, the scientist Hal Finney introduced the idea of Reusable Proof of Work (RPoW) and how it can be implemented in cryptocurrencies.
He encouraged the idea ‘of a server designed to allow users worldwide to verify its correctness and integrity in real-time’ and figured out a way to provide secure and consensus transactions. It was put into practice for the first time in 2009, when the first Bitcoin transaction happened between Finney and Bitcoin’s developer Satoshi Nakamoto.
From that point on, Proof of Work has become a key feature of the blockchain, and the way it works is crucial to maintaining the integrity of the network.
What does Proof of Work Prove?
Although blockchain uses software code, it needs hardware to be functional. Since blockchain is a decentralized technology, the hardware shouldn’t be stored in the same place or controlled by a limited group of people. That’s why it was only logical for the hardware to be all around the world, available to whoever wanted to join; not by exploiting them but by giving them responsibility and ownership. This trust is justified by their work or, in other words, by their Proof of Work.
So, the first step for miners is to equip themselves with the necessary hardware and software. All network members use this power for crypto transactions, whereas miners also use it to verify those transactions, add new blocks and generate new Bitcoins. To prove the power of their hardware, they need to solve complex PoW puzzles. The first who solves one, adds a new block to the chain. After it’s verified by the decentralized nodes in the P2P Bitcoin network, the miner gets awarded.
To maintain a target block time, the difficulty of PoW functions can be adjusted periodically. Miners compete with one another to add blocks to the chain, and the longer the chain is, the more computational work it requires to add new blocks.
This prevents the possibility of a single user monopolizing the network’s computing power. Moreover, it makes it nearly impossible for someone to create a malicious block without the support of 51% of the network’s mining power. As a result, the energy used in malicious mining may outweigh the gains made.
Photo Illustration: Freepik
Why do Cryptocurrencies Need Proof of Work?
Now that we’ve covered the basics, let’s try to understand how is Proof of Work algorithm is implemented in blockchain with a more standard definition:
Proof of Work is a consensus mechanism that ensures a new block is valid only after the miners have verified it. It prevents new users from creating unauthorized blocks, encourages decentralization within the mining industry, provides secure transactions, and prevents spamming and cyber-attacks.
As you may have noticed, this logic fundamentally differs from conventional bank accounts, which do not guarantee check’s correct crediting or debiting. In a traditional bank, the value is based on the trust between parties.
Another reason Proof of work is a vital element of the blockchain is that it provides incentives to participating in the network. Thanks to PoW, crypto can remain a decentralized consensus mechanism because it ensures peer-to-peer transactions are secure, reliable, and time-efficient, without the need for a central authority.
Where is PoW Usually Implemented?
With more people gaining interest in crypto and more companies adopting Web 3.0, the demands of the network became too exhausting, resulting in transaction speed becoming too slow to meet the users’ needs.
That’s why, to this day, Proof of Work is mainly used for Bitcoin, Litecoin, Dogecoin, and Ethereum 1.0, whereas the majority of newer cryptocurrencies have turned to Proof of Stake (PoS), which we’ll explain below.
As mentioned earlier, PoW was first put into practice in Bitcoin transactions and is still most commonly used for these purposes. To demonstrate its widespread use, this is how the efficiency of Bitcoin mining hardware looks like, according to the International Energy Agency:
Efficiency of Bitcoin mining software. Source: IEA
How Does Proof of Stake Differ from Proof of Work?
Let’s start with the idea that Proof of Stake is an alternative to Proof of Work, and here’s why.
Hardware power in PoW is highly redirected into providing security against cyber-attacks, meaning that, for the software to be functional, it’s not necessary to have hardware with such massive power.
Quite the contrary – this software requires hardware of significantly less strength and therefore consumes less energy. This is why Proof of Stake was introduced.
On the one hand, PoW requires miners to invest in hardware, which is why they are motivated to do their job promptly and honestly. On the other hand, PoS doesn’t require that much of an investment, so the quality and credibility of their work need to be proven in another way. That’s ensured by locking a certain amount of their cryptocurrencies or, in other words, by staking them. The award they get for their work equals to the amount of staked crypto.
In conclusion, Proof of Stake does provide faster transactions, but the transaction fees on the chains that use PoS are also higher. As mentioned, it’s primarily used for newer cryptocurrencies, the most popular ones being Ethereum 2.0, Cardano, and Tezos.
