I f you are planning to invest in the cryptocurrency marketplace, then it’s essential to expand your knowledge about how cryptocurrencies work under the hood. If you’re a newcomer in crypto space and have started looking into various information resources about how digital currencies work, then you must have come across the term Proof of Work.
Many new investors in cryptocurrency world become frustrated when they try to understand the meaning of these terms, as the explanation are often unnecessarily complex. However, these terms are relatively simple to understand if explained correctly.
Proof of work is a protocol whose main objective is to block cyber-attacks like DDoS attack (distributed denial of service attack) which exhaust the resources of a computer system by sending multiple fake requests
As the name implies, it requires the decentralized participants who validate blocks to show that they have invested significant computing power in doing so. In bitcoin, validators compete to process a block of transactions and add it to the blockchain. They do this by some random guesses on their computer to come up with an answer within the parameters established by the network. However, it takes real-world resources to work out these solutions, which means that miners cannot deceive the system.
POW is not a new idea, however, the way through which Satoshi combined this and other existing concepts like cryptographic signatures, Merkle chains, and P2P networks into a practical distributed consensus system were quite ground-breaking.
Proof Of Work And Mining:
Proof of work can be defined as an expensive computer calculation; that needs to be performed in order to form a new group of trust fewer transactions on a distributed ledger called blockchain
Mining serves two purposes:
- To validate the authenticity of a transaction, or avoid the so-called double-spending.
- To create a new digital currency by rewarding miners for performing the earlier task.
This is what happens when you want to set a transaction:
- Transactions are bunched collectively into what we call a block.
- Miners authenticate those transactions as each block is legal.
- To do so, miners should crack a mathematical puzzle known as proof of work problem.
- A reward is given to the first miner who cracks each block problem.
- Authenticated transactions are stored in the public Blockchain.
When a miner finally finds the right solution, he/she announces it to the whole network at the same time, receiving a cryptocurrency prize (the reward) provided by the protocol.
This difficulty which is also known as a threshold determines the competitive nature of mining. As more and more computing power is added to the network, the difficulty of parameter increases thus increasing the average number of calculations required to create a new block. To maintain a positive economic balance, miners are pushed to improve the efficiency of their mining systems which again increases the cost of the block creation.
Proof of work is not only used by the bitcoin blockchain but also by ethereum and many other blockchains. Some functions of the proof of work system may differ as they are created specifically for different blockchains.
Distributed & Trustless Consensus
POW (Proof of Work) utilizes distributed & trustless consensus which means that if you want to send or receive money from someone then you don’t have to depend on third-party services.
When you utilize the conventional method of payment, you have to trust on the third party to set your transaction through different mediums (e.g. PayPal, MasterCard, Banks, and Visa). They keep their own private register which keeps the record of every transactions history & balances of every account.
The common example of this is if Noah sent James $100 then trusted third-party service would debit Noah’s account and credit James’s one, so they both have to trust this third-party do the right thing.
With Bitcoin & other digital currencies, everyone has a replica of the ledger (blockchain), so no one has to trust on third parties because anyone can directly authenticate the information.
Major Setback In PoW
The major flaw in PoW is that it requires a grave amount of computational power, more than the normal person could afford, or would even be competent to work with. This is the major reason why the mining community is getting smaller and more selected which technically goes against the concept of decentralization & could possibly lead to a 51% attack.
This flaw gives attackers an added benefit that it is controlled by a miner which is probably a mining pool. They can cancel legal transactions and can also double spend funds with that capability. They have done this by creating & verifying their own fake blocks, and they do it so quickly that the rest of the mining community’s rightful work of creating genuine blocks will be canceled.
Proof Of Stake
Proof of stake is a different way to validate transactions and achieve the distributed consensus. It is also an algorithm just like proof of work with a different process to reach the goal. In proof of stake, the creator of a new block is chosen in a deterministic way which depends on wealth, also defined as stake, not like Proof-of-Work, where the algorithm rewards miners who solve mathematical problems with the goal of validating transactions and creating new blocks.
In proof of stake all the digital currencies are created beforehand, and their number never changes. This means that in the PoS system there is no block reward, and the miners will charge the transaction fees.
It is pretty much evident that the PoW method has a lot of disadvantages when compared to PoS. Certainly PoS has the upper hand and the reasons behind it are very simple to understand. Benefits of a loyal network and lesser energy consumption have led to the shift from the primarily used PoW algorithm to the PoS algorithm. The PoS method is more efficient and decentralized which leads to the growth of blockchain as more people get involved in it.