Safety on the blockchain: Proof of Work explained
Originally developed in the 1990s to battle spam email, Proof of Work (PoW) has come a long way and become very popular since Bitcoin adopted it
Did you ever wonder why blockchain transactions are considered so safe? Even if you are familiar with how this works, can you explain it if somebody asked you?
The consensus algorithm was made to ensure security on the network. But, before we dive in, we have to take a few steps back in order to understand how exactly this helps the blockchain decentralized system, where information is shared to everyone in the network, to stay safe.
In recent years, the popularity of cryptocurrencies has grown tremendously, and the majority of cryptocurrency work on a Proof of Work (PoW) concept.
It became very popular after Satoshi Nakamoto, Bitcoin’s architect, first applied the technology for use in a digital money system in Bitcoin’s white paper.
Due to PoW, Bitcoin and other cryptocurrency transactions can be processed peer-to-peer in a secure manner without the need for a trusted third party. It is used widely in cryptocurrency mining, for validating transactions and mining new tokens.
What is PoW?
Proof of Work (PoW) is a decentralized consensus algorithm in a blockchain network.
This algorithm requires miners (a group of people) compete to complete the transaction on the network.
The process of competing with each other to solve a puzzle is called mining.
In order to add a new block, miners on a PoW network compete against each other to solve complex mathematical problems in a process named hashing. These puzzles are very hard to solve, but should be easy for the network to verify the correct solution.
Once the puzzle is solved and a new block is verified and added to the network, the miners get rewarded for their work.
The most famous application of PoW is Bitcoin, which is the core of cryptocurrency development globally today. It's market share is around 41% of the $2.10 trillion total crypto market.
Bitcoin & Ethereum are the classic example of PoW which command over a $1.3 trillion market with an overall $ 2.1 trillion.
How does PoW work?
The first block in a PoW blockchain is named the genesis block, also known as block 0.
By definition, this block does not reference a previous block.
The subsequent blocks added to the blockchain always refer to the previous blocks and each contain a copy of the full, updated distributed ledger.
The added block is then verified by all the users on the blockchain network and everyone is aware of the transactions done.
In creating new blocks, miners hash three things: the hash of the previous block, the set of transactions to be added to the blockchain, and a nonce (without it the resulting hash would always be the same as the blockchain data is invariable) until the right hash is found.
That verification is what makes the safety net of the system. In order to “corrupt” a blockchain, you would have to convince at least 51% of the peers to change the hashing information just to tamper a transaction.
Since miners get good rewards to make everything work pristinely, it doesn’t pay off to mess with it - therefore, it is extremely hard to convince 51% of the users to agree with a fraud in the system.
However, PoW requires a huge amount of electricity, as more miners are running their machines to solve the mathematical problems for which they receive coins for solving it. There are concerns that power is solely used for mining purposes and citizens don't get it.
As per an estimate every year only Bitcoin mining operations requires 130 terawatt per year, which is far more than the energy usage of many countries. If we add Ethereum and other minable coins then power usage will increase further.
To overcome this problem, many miners have shifted to clean energy and Ethereum blockchain has gone a step forward and have decided to move towards Proof of Stake (PoS).
After this, which is expected to be completed by 2022, no miners will be required to verify the transactions.
In the latest upgrade, ETH has started staking mechanism. PoW is the older of the two, used by Bitcoin, Ethereum 1.0, and many others. The proof of stake (PoS) powers Ethereum 2.0, Cardano, Tezos and other (generally newer) cryptocurrencies.
PoW plays a fundamental role in supporting the security and integrity of crypto-financial technology. It helped cryptocurrencies including Bitcoin to become the backbone for providing an alternative financial system to the world.
Kleverly research before you opt for crypto!