Learn about how Proof-of-Work (PoW) is used to verify blockchain transactions in popular networks such as Bitcoin, Dogecoin, and Monero, and explore the benefits and drawbacks of this consensus algorithm.
Many blockchains employ the Proof-of-Work (PoW) consensus process to check the legitimacy of network transactions before they are compiled into blocks and published on the open ledger for everyone to see. The three most widely used PoW blockchains are Bitcoin, Dogecoin, and Monero. In this post, we’ll describe the consensus algorithm’s operation and evaluate its advantages and disadvantages.
Function and Purpose as Evidence of Work
The PoW consensus algorithm was first proposed by Hal Finney in 2004 as Reusable-Proof-of-Work (RPOW), a forerunner to the model later presented by Satoshi Nakamoto in his infamous whitepaper. Its goal is to ensure the proper operation of a decentralized network of anonymous participants without requiring them to have any form of mutual trust.
The consensus algorithm is responsible for ensuring that each actor is financially motivated to take the action that will benefit the network itself because blockchains by design lack a centralized authority (such as a bank) to act as an intermediary between network participants.
In reality, block rewards—new bitcoins that are issued to miners when they have done their work successfully—incentivize them to accurately validate transactions and safeguard the network’s security.
Let’s now examine the particular situation of Bitcoin to better understand how the PoW guarantees the security of the most well-known blockchain in the world.
Mechanism for proof-of-work agreements
On the bitcoin blockchain, transactions are processed in groups before being verified and waiting to be included in a block.
The block header, a hexadecimal (i.e., base 16) number produced by the blockchain’s hash function, contains data on the date, wallet addresses, and transaction amount. The blockchain is made up of individual blocks, each of which also contains the hash of the previous block. As a result, it is impossible to edit one block without also updating all the preceding blocks, which makes the process extremely complicated and expensive.
Miners must verify a block’s hash before it can be added by solving a challenging cryptographic puzzle, which uses a lot of processing power.
Due to the competitive nature of mining, miners compete with one another to solve the puzzle, validate the block, and win the reward, which consists of $BTC from transaction fees and block rewards.
Miners join together to build “mining pools” and pool their processing power and incentives in an effort to boost competition and their chances of winning. Today, it is nearly impossible to earn rewards without taking part in a mining pool due to the intense competition in the industry.
Objections to the Proof-of-Work
PoW and mining have received a lot of criticism throughout the years, mostly concentrating on two major problems: centralization and environmental effect.
The critique of mining’s environmental effects is based on the significant energy consumption that goes along with a high-intensity activity like mine.
While it is undeniable that mining cryptocurrencies uses a lot of energy, a number of efforts have developed in recent years that seek to employ green or renewable energy instead, greatly reducing network emissions.
Regarding centralization, detractors contend that the composition of miners’ pools is now unbalanced, with the larger pools holding a considerable share of the network’s hash rate.
The graph displays that over the last 24 hours, the top four mining pools held roughly 77.2% of the network’s hash rate.
In the end
Proof-of-Work is still used by many large cap protocols due to the high level of security it ensures, even though Proof-of-Stake (the other dominant consensus algorithm in the crypto landscape) has seen significant growth in recent years, particularly after the Ethereum Merge, which approved the network’s switch from PoW to PoS.
In the coming years, is PoW in risk of being totally replaced by PoS, or will it continue to be one of the consensus algorithms that blockchains rely on the most to ensure their security?