Last Updated:
April 1, 2022

What is Proof of Work?

What is Proof of Work?

What is Proof of Work?

The term 'Proof of Work' is frequently used while assessing modern blockchain networks. Satoshi Nakamoto's initial Bitcoin whitepaper contains the first mention of a PoW consensus mechanism. But what exactly is PoW, and why is it so crucial for blockchain technology?

Proof of Work is the underlying content that drives trades, users, and miners within a public digital ledger. The system successfully provides the timely continuation of all transactions within a network to avoid various malicious behaviors.

Does it appear to be difficult? Don't be concerned! We've put together an easy-to-understand explanation for Proof of Work. We'll look at each activity and incentive that drives PoW networks in the following sections.

What is Proof of Work?

Proof of work is a method that deters malicious activity that could jeopardize the network's stability through sheer computing power. Hall Finney, who coined the term "reusable proof of work," first proposed the concept in 2004. PoW's primary goal was to prevent spam emails and DDOS attacks.

Five years later, Satoshi Nakamoto, the anonymous developer of Bitcoin, turned Finney's concept into the world's first blockchain network. PoW on the blockchain, like its predecessor, inhibits malicious behavior. It is also the driving power that allows transactions in a decentralized, immutable ledger.

The basic technique in blockchain networks that processes transactions by providing hashes and confirming them is called Proof of Work (PoW). Miners who partake in the network by verifying new transactions for a financial incentive - in this instance, Bitcoin - maintain the system.

PoW can thus be thought of as a pattern that both miners and users follow while engaging with a blockchain network.

Double Spending

Double spending is a type of malicious action that Proof of Work prevents. A digital token backs all transactions on blockchain networks with a monetary value.

You'd need to send X amounts of BTC to send $50 to a friend via the Bitcoin network.

But how can we be sure that this coin hasn't previously been used to pay for another service or item? A network can't accurately verify that a user didn't double spend tokens without PoW. As a result, blockchain technology is rendered useless and incompatible with its intended goals.

This problem might be easily solved by establishing a central authority verifying transactions and ensuring that coins are not spent twice. However, while it is simple to do so, it does not aid in implementing decentralization. Why bother with blockchain networks when they function similarly to a bank?

Satoshi Nakamoto solved the double-spending problem by requiring all network members to access the ledger's entire transaction history. It isn't easy to detect if specific tokens have already been utilized if you know every transaction in a blockchain network history.

As a result, Nakamoto considered making the transactions public. All of the network's users could consent to a single transaction history based on the order received and sent if this option was available.

Timestamping

Time is the best tool for determining how transactions are ordered because it is linear. We know where a payment is in the general ledger by stamping the moment it was created onto a transaction. As a result, we now have timestamping!

A timestamp server was used in the initial Bitcoin network to attribute the time of a transaction's origination. The server timestamps the hash of a block, which contains numerous transactions. After that, the hash of that block is made public.

The timestamp server contains the last timestamp in its current hash, an essential process component. The server creates an unbreakable chain in which each timestamp strengthens the network's stability, legitimacy, and validity.

Timestamping in blockchain via Proof Of Work

Proof of Work consensus systems are versions of timestamp servers in blockchain networks. It functions similarly to a traditional timestamp server, except it is decentralized and does not require a central authority.

PoW employs the SHA-256 cryptographic hashing method. The network uses a nonce for each transaction to generate unique hashes; otherwise, it would always output the same hash.

Mining, a process in which blockchain nodes solve complex mathematical problems to verify and confirm transactions, underpins all of these processes. The network awards the node a percentage of a block mining payment based on his contribution to the network when they complete their duty.

Each node is rewarded in proportion to the amount of hardware power it contributes to the network. The more significant the amount of processing power used to support the Bitcoin network, the more coins one earns.

There are gigantic mining farms worldwide, each containing thousands of graphics cards whose processing power is utilized to verify transactions and mine BTC.

Quick summary

Let's summarize how Proof of Work works to understand better how it works. After all, repetition is the mom of skill, and with the concepts presented thus far, we have learned a great deal in a minimal amount of time.

When we think of blockchain networks, we think of a public, decentralized, and widely distributed digital ledger. When you transmit or receive payment from someone, the transaction is logged in the network for all time.

Each transaction is stacked into a block, which can carry thousands of transactions at any given time. Miners will conduct exceedingly complex tasks to confirm the block once it is ready to verify all of these transactions. After confirmation, it will be forever logged in the network, with no way for someone to disrupt or modify the stored information.

This process requires Proof of Work because it prohibits information manipulation. This is accomplished by timestamping each transaction and block in the sequence they were made or validated. A hash, or a long string of numbers, is used to verify the process.

Hashes are used to confirm that the data received matches the data sent. The original data in this scenario relates to all previous network transactions that have been approved. Miners can't verify transactions if a block isn't in sync with previous blocks and the hashes don't match.

Mining

Now that we've summarised the basics of hashing and timestamping let's look into mining. If we only had a computer generate and confirm hashes, we'd be done in seconds. We need to set the work in Proof of Work to avoid this from happening.

Every blockchain network establishes a level of difficulty that makes mining time-consuming. The problem is typically modified every 10 minutes after each block is mined. The network determines the test, which establishes a sort of hash target. The more tricky it is to mine an entire block, the higher the target.

Miners, as previously stated, use nonces when hashing. These nonces represent an integer (a number only used once) that allows miners to generate a less complicated hash than the target difficulty. When Onc miners find a valid hash, they share it with the rest of the network, and the transaction block is added to the blockchain.

Proof of Work VS Proof of Stake

Aside from Proof of Work, there is also Proof of Stake, a consensus mechanism. Developers debate which mechanism is best for blockchain networks, as each model has advantages and disadvantages.

If you've heard of Proof of Stake (PoS), you've almost certainly heard about Ethereum 2.0. Developers have opted to establish a new Ethereum network based on PoS to make their network more efficient, scalable, and cost-effective.

While the notion of a point-of-sale system dates back to 2011, it is just now being implemented. If successful, Ethereum might be one of the first large-scale Proof of Stake systems. But what is PoS, and how does it differ from PoW?

Essentially, the distinction is based on who funds the network. Validators are used instead of miners in pos. The new network differs from PoW because it does not require mining and does not rely on predicted hashes.

In Proof of Stake, the network chooses a user randomly to propose a block. If the block is genuine, he receives the reward, which is made up of the transaction fees for the block. With this in mind, we may deduce that when transaction fees rise, a validator earns more.

PoS chooses a user based on several characteristics to determine whether or not he will be the one to submit a block. To become a validator, a person must first stake tokens.

Related Reading: Proof of Work vs. Proof of Stake

What is staking?

The act of securing the native tokens of the network. Staking is essentially the process of providing collateral to be qualified to join a network. A user needs to invest 32 ETH to use Ethereum 2.0.

Why is staking so crucial, and why do users have to 'pay' to authenticate the network? Because it is a strategy for encouraging honesty while discouraging cheating. The network will take a validator's stake if it does not perform well or behaves maliciously.

Is PoS better than PoW?

Since Ethereum is switching from PoW to PoS, there must be a compelling reason for the developers to do so. Does this imply that PoS is preferable to PoW, and if so, why?

PoS, as you may have guessed, eliminates the need for hardware power to verify transactions. As a result, the mechanism is more environmentally friendly and lowers mining farm operating costs. Bitcoin farms use a lot of electricity, which some experts say is a drawback because it adds to global pollution.

Another rationale for the switch to PoS in Ethereum 2.0 is that it is more secure. According to Vitalik Buterin, Proof of Stake will make the network more decentralized and secure. Furthermore, the consensus mechanism will aid in the reduction of fees and the scalability of Ethereum for its users.

Bitcoin is the only network that has successfully demonstrated that it can work on a large scale, thanks to its Proof of Work design. It's still unclear what Ethereum will achieve with a PoS network, as there are no guarantees that the new format will work or benefit the network.

Another issue with Proof of Stake networks is that they are less secure than PoW networks. It may be easier to manipulate or even attack PoS blockchain networks without the protection provided by miners.

All we can do now is wait and see how Ethereum 2.0 succeeds, given the facts above. If it outperforms Bitcoin's scalability, PoS is unquestionably the better alternative. If not, PoW will continue to reign supreme over blockchain networks.

Conclusion

Proof of Work is a consensus mechanism used to prevent double-spending when users spend the same cryptocurrency multiple times. Several processes, including mining, hashing, and timestamping, were used by Satoshi Nakamoto to introduce PoW into Bitcoin.

These processes keep the Bitcoin ledger decentralized, distributed, and open. Aside from PoW, we now have a new consensus mechanism called Proof of Stake, which does away with the concept of mining entirely.

Is PoS preferable to PoW? Yes, in theory. It must, however, be demonstrated in practice via a huge blockchain network that serves thousands of users. Developers are making their first serious attempt with Ethereum 2.0. It has to be seen whether the initiative is effective in implementing pos. Until then, PoW will continue to be the best way to organize blockchain networks.