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What Is Proof-of-Work (PoW) in Crypto?

What Is Proof-of-Work?

A major component of cryptocurrencies is decentralization. A transaction confirmation method independent of financial institutions is required to make that happen. Proof-of-Work is the consensus mechanism that helps in verifying & confirming any transaction that takes place on the blockchain. Now let us understand exactly what proof-of-work is.

PoW or Proof-Of-Work is, simply put, the mechanism used to secure transactions and keep records of several cryptocurrencies, like Bitcoin and Ethereum, to name a few. Proof-of-Work is an important aspect of all things crypto-related as it is the first mechanism that was introduced so that any transactions that took place in the decentralized space were secure and verified without the unnecessary involvement of any third parties.

The overall Blockchain system requires a lot of computing power, which is why it’s dubbed “proof-of-work.” Now let’s understand what proof-of-work in blockchain is. Virtual miners in the crypto community from around the globe compete to be the first to solve a mathematical challenge to secure and verify proof-of-work blockchains. The network pays out a fixed sum to the winner in addition to allowing them to modify the blockchain with some of the most recent verified transactions.

How Proof-of-Work Works?

How Proof-of-Work works
Source | The cycle of how proof-of-work works

Now that we clearly understand PoW let us cover how proof-of-work works. To figure that out, we must also understand proof-of-work in blockchain.

A blockchain is a distributed ledger composed of data blocks for every cryptocurrency. Each block of transactions in a proof-of-work cryptocurrency has a unique hash. A crypto miner must provide a target hash lower or equal to the block’s hash for the block to be confirmed.

Miners employ computing-intensive mining equipment to accomplish this. Whoever becomes the first miner will get the target hash, which as a result, will allow them to modify the blockchain and collect cryptocurrency incentives.

What calculations exactly are the miners from the crypto community performing? The so-called “hash” that Bitcoin miners produce transforms the input into an apparently random array of characters and numbers.

The overall process of continuously adding new blocks to the blockchain requires proof of work. Miners, the participants in the crypto community who carry out proof-of-work, bring blocks to life. Every time a miner finds a new winning proof-of-work, which occurs around every 10 minutes, the network approves a new block.

Finding the desired hash is challenging, but verifying it is straightforward. This is PoW in cryptocurrency and why it works well in cryptocurrencies. The procedure is challenging enough to shield transaction records from manipulation. In addition, it is simple for all other miners to verify a target hash once it has been located.

Why Is Proof-of-Work Important?

Satoshi Nakamoto invented Bitcoin, the first cryptocurrency, in 2008. This kickstarted the crypto community as we know it today. In a well-known white paper, Nakamoto outlined a digital currency based on proof-of-work protocols that would enable safe transactions without any central authority.

The “double-spending problem” in the crypto community makes proof-of-work important. The double-spend problem was one of the problems that have previously hampered the creation of useful digital money.

It is more difficult to overcome without a leader in charge but can be resolved via proof-of-work. If users may double-spend existing coins, this results in the inflation of the available amount, which in turn devalues everybody’s coins and renders the currency unstable and worthless.

How the proof-of-work works here is that it prevents duplicate spending by encouraging miners to examine the legitimacy of new cryptocurrency transactions before integrating them into the blockchain’s distributed ledger.

Hopefully, this has helped you in realizing the importance of this mechanism and what is PoW in cryptocurrency.

Example of Proof-of-Work

Example of Proof-of-Work
Source | Bitcoin was the first to use PoW in Cryptocurrency

It’s been established as to what is proof-of-work. Now let’s take a look at an example of Bitcoin for this one. This will also help you understand what proof-of-work in blockchain is and what is PoW in cryptocurrency.

Whenever a Bitcoin transaction takes place, it is subject to security checking before being collected into a block that needs to be mined. The block’s hash is then produced via Bitcoin’s proof-of-work process. The SHA-256 algorithm used by Bitcoin always produces hashes containing 64 characters.

Miners compete to produce a preset hash lower than the block hash first. The winner will add the most recent block of transactions to the blockchain for Bitcoin. In addition, the winner gets compensation in the form of transaction fees and freshly created coins. The total number of coins in circulation for Bitcoin is limited to 21 million, but miners still get compensated with transaction fees.

Proof-of-Work vs. Proof-of-Stake

There are two consensus techniques in the crypto community, proof-of-work and proof-of-stake, introduced with the launch of Peercoin (PPC) in 2012.

In the latter, it selects transaction validators based on how many coins a user has “locked up” or staked to the network. Let us take a look at the difference that these consensus mechanisms have.

Both approaches verify incoming transactions before including them in a blockchain. Participants are usually referred to as “validators” rather than “miners” with proof-of-stake. 

One significant distinction is that validators lock up predetermined quantities of cryptocurrency, i.e., their stake, in a smart contract on the blockchain rather than solving mathematical equations.

Another important difference is energy usage. Proof-of-stake blockchains enable networks to run with significantly reduced resource consumption since they do not require miners to expend electricity on repetitive operations. This hopefully has given you a better idea of how proof-of-work works.

Criticism of Proof-of-Work

1. Energy Requirements 

Unfortunately, proof-of-work as a consensus mechanism in the crypto community uses a lot of energy and wastes resources. Proof-of-work mining tends to concentrate miners into a handful of individuals who can finance the equipment because it demands so much computer power. Additionally, it tends to draw computing resources to regions with affordable electricity.

2. Centralization 

Decentralization is one of the benefits of cryptocurrencies that appeals to anyone part of the crypto community. However, mining activities have now consolidated in a few key companies due to the high computing and power requirements of proof-of-work. This can result in a small number of companies dominating most Bitcoin business operations.

Cryptocurrencies That Use Proof-of-Work

1. Bitcoin 

The crypto community’s first virtual currency to be introduced was Bitcoin (BTC). It was intended to function as money and a means of payment independent of any specific individual, group, or entity, doing away with the requirement for third parties to be involved in financial transactions. Bitcoin also introduced the concept of proof-of-work.

2. Litecoin 

Litecoin (LTC) is a P2P (peer-to-peer) virtual currency with no single entity controlling it. The network of Litecoin enables rapid, almost cost-free transactions between individuals or organizations anywhere in the world. It was introduced in October 2011 as “the silver to Bitcoin’s gold.”

3. Dogecoin 

Dogecoin (DOGE) is a cryptocurrency based on the Doge meme and was introduced to the crypto community in 2013. Despite its lighthearted beginning and just starting as nothing but a silly joke, it has eventually managed to rise to the top and develop a devoted and loyal fanbase.

4. Monero 

Monero (XMR) is another popular crypto coin. What sets it apart from the crowd is that it achieves anonymity and fungibility by utilizing a decentralized public database and security technologies that disguise transactions. Observers cannot interpret addresses, payment sums, account balances, or transaction histories.

5. Bitcoin Cash

Bitcoin Cash is a fork that was created from the Bitcoin cryptocurrency. It is a variant of an altcoin developed and introduced to the crypto community in 2017. Bitcoin Cash was further divided in November 2018 into two cryptocurrencies: Bitcoin SV as well as Bitcoin Cash.

Conclusion

So far, we have managed to discuss various aspects of what is proof-of-work, how proof-of-work works, what is PoW in cryptocurrency, etc. 

It is clear that although it has its own set of major flaws, proof-of-work still has a lot of benefits and is one of the most important aspects of how cryptocurrencies operate on the blockchain. With the introduction of proof-of-stake in the crypto community, though, many cryptocurrencies are changing their consensus mechanism, with the biggest example being Ethereum. With the introduction of Ethereum 2.0, the ETH network plans to adopt the proof-of-stake consensus soon this year.

Frequently Asked Questions (FAQs)

1. Why is Proof-of-Work Needed? 

Now that you clearly understand what proof-of-work is, understanding why it is needed won’t be a hard feat. Proof-of-work is designed to stop users from printing additional coins they didn’t earn or double-spend the coins. The currency would become essentially useless if users could use these coins more than once.

2. Who Invented Proof-of-Work?

Proof-of-work is a consensus mechanism that was developed and introduced by the very person who created Bitcoin, Satoshi Nakamoto. Fun fact for you, though, to this date, nobody is aware of the true identity of Nakamoto. We do not even know if that is an actual name or whether it is an alias.

3. What are the Problems with Proof-of-Work?

As you’ve come to understand what is proof-of-work, you know that, like everything, it has flaws. Proof-of-work uses up a lot of energy. In fact, Bitcoin uses up enough to power all of Switzerland! It is also prone to cyber-attacks. If one gets access to 51% of the crypto’s hash rate, they would be able to hack and double-spend all the coins they want.

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