Proof of Work (PoW) is an algorithm that is used within a Blockchain network to achieve trustless and distributed consensus.
In more detail, a trustless and distributed consensus system means that you don’t need to rely on third-party services to send and/or receive money from someone. This article will be giving a thorough definition of Proof of work, how PoW works, and the top 5 PoW coins available.
What is Proof of Work(PoW)?
Proof of work (PoW) refers to a system that necessitates a significant but manageable amount of effort to deter frivolous or malicious uses of computing power, such as sending spam emails or launching denial of service attacks. Hal Finney adapted the concept to securing digital money in 2004 with the idea of “reusable proof of work” using the SHA-256 hashing algorithm.
A large number of cryptocurrencies, including Bitcoin and Ethereum, use the proof-of-work algorithm. Most digital currencies track who uses them and how much money is in their accounts, and the most popular ones track who uses how much.
Unlike Bitcoin, cryptocurrencies do not have a cryptocurrency overlord to rule over them. Proof of work is required for the online currency to function in the absence of a central company or government.
Understanding Proof of Work
The proof-of-work model is a mechanism for confirming and recording cryptocurrency transactions. Every cryptocurrency has a blockchain, which is a public ledger comprised of transaction blocks.
Each block of transactions in a proof-of-work cryptocurrency has a unique hash. To confirm the block, a crypto miner must generate a target hash that is less than or equal to the block’s hash.
Miners accomplish this by employing mining devices that generate computations quickly. The goal is to be the first miner with the target hash because that miner will be the one to update the blockchain and receive cryptocurrency rewards.
Because finding the target hash is difficult, but verifying it is not, proof of work works well in cryptocurrency. The process is difficult enough to prevent transaction records from being manipulated. At the same time, once a target hash is discovered, it is simple for other miners to verify it.
Proof of work, in particular, aids in the resolution of the double-spending problem, which is more difficult to resolve when no designated leader is in charge. It is possible to double-spend coins, but doing so increases the overall supply of coins, depreciating the value of everyone else’s coins and making the currency untrustworthy and worthless.
Double-spending is a problem with online transactions due to the ease with which digital actions can be replicated. It is simple to copy and paste a file or send an email to multiple recipients. It is extremely difficult for malicious traders to double-spend their digital money due to proof-of-work. It is essentially proof that someone has run a large number of computations on their computer.
PoW and Mining
To function, Proof of work is heavily reliant on a calculation known as Mining. How can a miner be certain that they will be able to solve an under-target hash if a given data collection can only generate one hash?
They will add an integer known as a nonce to the input (a number that will be used once). When a valid hash is discovered and published to the network, a new block of the blockchain is created. Mining is a very competitive industry. Mining can sometimes feel more like a lottery than a competition. Only once every ten minutes will an acceptable proof of work being produced.
Miners are currently forming a mining pool to increase their chances of mining. Miners are rewarded based on how quickly they can generate new blocks in a given amount of time. Each miner who participates in mining will receive a portion of the pool’s rewards, which will also be used to cover transaction costs.
Blockchain mining based on proof-of-work consensus is difficult. If a single feature of the blockchain is changed, miners may be forced to re-mine all subsequent blocks. Proof of work has the advantage of preventing users from monopolizing the network’s computer capacity.
In Proof of Work (PoW), the mining process has two main functions:
- To verify the legitimacy of a transaction or avoid double-spending.
- To create new crypto assets by rewarding miners who successfully mine.
Example Of Proof of Work
Here’s an example of how Bitcoin uses proof of work to keep its blockchain secure.
When a Bitcoin transaction occurs, it is subjected to security verification before being grouped into a block to be mined. The hash for the block is then generated by Bitcoin’s proof-of-work algorithm. Bitcoin employs the SHA-256 algorithm, which always generates hashes of 64 characters.
Miners compete to see who can generate a target hash that is less than the block hash first. The winner receives the privilege of adding the most recent block of transactions to Bitcoin’s blockchain.
They are also rewarded with Bitcoin in the form of newly minted coins and transaction fees. Bitcoin has a fixed maximum supply of 21 million coins, but miners will continue to receive transaction fees after that.
Bitcoin’s proof-of-work algorithm aims to add a new block every 10 minutes. It does this by adjusting the difficulty of mining Bitcoin based on how quickly miners add blocks. When mining occurs too quickly, hash computations become more difficult. They become easier if the pace is too slow.
Top 5 PoW Coins
Bitcoin: Bitcoin is the first and most widely used PoW cryptocurrency. It is the coin that introduces the Proof-of-Work concept into the world of cryptocurrency.
Ethereum: Since its inception, Ethereum has been based on the PoW consensus. However, the cryptocurrency’s development team has been working to transition to PoS (Ethereum 2.0), a process that has yet to be completed.
Litecoin: As a lighter version of Bitcoin, it is only natural that Litecoin is also a PoW coin.
Bitcoin Cash: Bitcoin Cash, like Litecoin, is a fork of Bitcoin. As a result, it validates transactions using PoW.
Monero: Due to its PoW consensus model, the privacy-oriented cryptocurrency XMR is also mineable.
Proof-of-work vs Proof-of-stake
Because there is no central authority such as Visa or PayPal in the middle to prevent this, decentralized cryptocurrency networks must ensure that no one spends the same money twice.
To accomplish this, networks rely on a consensus mechanism, which is a method that allows all computers in a crypto network to agree on which transactions are valid.
Most cryptocurrencies today use one of two primary consensus mechanisms, proof-of-work or proof-of-stake. The more established of the two, proof-of-work, is used by Bitcoin, Ethereum, and many other projects.
Proof-of-stake is a newer consensus method used to power cryptocurrencies such as Ethereum, Tezos, and others. Proof-of-stake is easier to grasp if you first understand proof-of-work.