Crypto 101

Proof of Work (PoW) 101

A Brief Introduction to a Proof of Work System

Have you ever wondered how cryptocurrency mining works? By now you’ve heard about and read all about Bitcoin and other cryptocurrencies; But how exactly do BTC transactions work and how can you be sure your money is on the way? The answers lie in a Proof of Work (PoW) puzzle.

What is Proof of Work?

Proof of work is the system that keeps blockchains such as the Bitcoin and Ethereum networks secure from attackers. Proof of Work algorithms need to be solved to validate transactions and mine new blocks on the blockchain. These algorithms are constantly gaining complexity as the network ages. The miners, also called nodes, are typically high-end computers capable of solving the complex puzzles involved (See Blockchain 101). When a miner solves a PoW puzzle, he is rewarded with either the transaction fee (for validating a transaction), or with the block reward (for mining a new block where transactions take place). For more information on mining Click Here.

Solving the PoW puzzle means that miners have solved the different levels of each puzzle. The result of these puzzles is called hash. Hash data from a block is represented in the next block mined to heighten security and prevention of block violation.

Why Use Proof of Work?

PoW deters attackers from executing a DDoS (Distributed Denial of Service) attack. Nodes (miners) on the blockchain are constantly competing with one and other for transaction validation and the mining of new blocks. To execute an attack a network using a PoW system, attacker nodes need to gain majority among nodes. Attackers need to execute a 51% attack on the network. In the case of Bitcoin (see Bitcoin 101), a 51% attack is not feasible because of the size of the network.

The Case For and Against PoW

Proof of Work is the system that laid the foundation for decentralized currencies to even exist. By incentivizing the community to compete against each other, currencies in a Proof of Work system can keep their networks secure. Unlike the Proof of Stake system, a PoW system encourages this competition. Anyone can mine, whereas in a Proof of Stake system, only the wealthiest of the community can participate.

While Proof of Work systems have their place, they do come with weaknesses. As a network continues to grow, solving the hash requires more and more computing power. The hardware miners need to compete in the network becomes highly specialized. The amount of electricity needed to power these rigs is enormous. Many argue that the massive amount of wasted resources is better used for something other than a PoW puzzle. Some countries, and their municipalities, are recognizing the resource usage and acting to prevent this as well.

 

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