Proof-of-work: An In-Depth Explanation Of The Consensus Mechanism!

Without any intervention from Visa or PayPal, a decentralized cryptocurrency must ensure that no one spends the same money twice. Networks use a system known as a “consensus mechanism,” which enables all the computers in a crypto network to concur on which transactions are valid to do.

The majority of cryptocurrencies in circulation today use one of two main consensus techniques. The oldest of the two is proof of work, which is utilized by many other projects like Ethereum 1.0 and Bitcoin.

Proof of stake is the name of the more recent consensus algorithm that underpins Ethereum 2.0, Cardano, Tezos, and other (usually newer) cryptocurrencies. We’ve coupled them in this explainer because understanding proof of work is necessary before understanding any other consensus mechanism.

What is proof of work?

Cryptocurrencies lack centralized gatekeepers that would check the veracity of newly uploaded transactions and data to the blockchain. To validate incoming transactions and put them as new blocks on the chain, they instead rely on a dispersed network of participants.

A consensus technique known as proof of work is used to determine which of these network users, or “miners,” is permitted to take on the lucrative duty of validating fresh data. It’s profitable because when miners correctly validate fresh data and don’t game the system, they are paid with the new cryptocurrency.

Cryptocurrencies employ this method to check the veracity of newly added transactions to a blockchain. In order to secure the integrity of fresh data on the decentralized networks used by cryptocurrencies and other defi apps, proof of work is used.The key to the proof of work is the “work”: In order to prevent anyone from abusing the system, the system forces miners to compete with one another to be the first to complete illogical mathematical riddles. The winner of this competition gets to choose which set of data or transactions gets added to the blockchain first.

The new bitcoin that is winning miners are rewarded with is only sent to them when other network users have confirmed that the data being added to the chain is accurate and genuine.

How does this mechanism work?

Like you would input transactions in a spreadsheet, all bitcoin transactions are recorded in distributed ledgers called blockchains. Every block resembles a single cell. A block header, which is a hexadecimal integer produced by the blockchain’s hashing mechanism, contains data including transaction amounts, wallet addresses, time, and date in addition to being encrypted.

Each block’s hash is generated and used in the block that comes after it. Because the data from every block is included in the hash of the most recent block, this results in a chained ledger of blocks that cannot be changed.

Hash:

Before a new block may be opened after a previous block has been closed, the hash must be confirmed. This is where evidence of labour is important. The hash is a 64-digit hexadecimal encrypted number. A hash for a significant amount of data may now be produced in milliseconds, thanks to contemporary technologies. However, miners attempt to predict that hash, which is incredibly time-consuming in terms of processing.

Nonce:

The nonce, which stands for “number used once,” is a group of integers that are part of the hash. A hash is generated from publicly accessible data using a nonce equal to zero when mining is started by a miner, the application running on a node that attempts to solve the hash.

Solving the hash:

The hash has been successfully solved if it is less than the current network target. The hexadecimal result of a mathematical formula that determines the mining difficulty is known as the network target.The mining programme multiplies the nonce by one and generates a new hash if the hash exceeds the target. This is how the entire network of miners attempts to solve the hash.The miner that cracks the hash gets rewarded with the current amount for their labour on the Bitcoin network.

Explaining Proof-of-work with an example:

When a Bitcoin transaction takes place, it is subject to security checking protocol before being collected in a block that needs to be mined by the miner. The block’s hash is then produced through Bitcoin’s proof-of-work mechanism. The SHA-256 hashing algorithm used by Bitcoin always produces hashes with 64 characters.

Miners compete to produce a target hash that is lower than the block hash first. The most recent block of transactions will be added to the blockchain for Bitcoin by the winner. In addition, they get bitcoin rewards in the form of transaction fees and freshly devised coins. The total number of coins for Bitcoin is limited to 21 million, but even beyond that, miners will still be compensated with transaction fees.

A new block is intended to be added by the proof-of-work method employed by Bitcoin every ten minutes. It does this by altering the difficulty of mining Bitcoin in accordance with the rate at which miners are adding blocks. The difficulty of hash computations increases if mining proceeds too quickly. They become simpler if they move too slowly.

Why is Proof-of-work needed in cryptocurrencies?

The main goal of proof of work is to provide people with a compelling reason to commit the time and money necessary to add legitimate blocks to a cryptocurrency’s blockchain.

William J. Knottenbelt, a professor at Imperial College London’s Department of Computing, believes that maintaining an agreed-upon transaction record without the use of a central authority is the challenge with a blockchain like bitcoin. The crucial question, then, is how a group of peers with comparable status may come to an agreement on who should be given permission to add to the shared transaction record.It is done on purpose to make computing a hash exceedingly computationally challenging.

The proof of work mechanism disincentivizes attempts to compromise the integrity of the blockchain by requiring participants to spend a lot of money on computational resources. Additionally, it lessens the possibility of double spending or the simultaneous use of two bitcoins, which would undermine trust in the cryptocurrency.

In essence, bitcoin mining is a race amongst miners to add the next block to the blockchain and earn payment in new bitcoins by being the first to solve very difficult cryptographic riddles. Only until the other systems on the network have confirmed the validity and correctness of the solution using the proof of work protocol does the successful miner earn the reward.

The reason that validating bitcoin transactions requires so much work is that the majority of candidate blocks do not contain the right hash. In order to guarantee that fresh blocks are created on a regular basis, the difficulty of this procedure can really be altered.

Demerits of proof-of-work consensus mechanism:

Proof-of-work systems have come in for some criticism, largely because of how much electricity they consume:

Energy needs: The New York Times claims that in 2009, one Bitcoin could be mined with a desktop computer and very little electricity. But to mine a single Bitcoin in the year 2021, you would have needed to use as much electricity as an average American home would in nine years.

Centralization: Decentralization is one of the major benefits of cryptocurrencies that appeals to investors the most. However, mining activities have become consolidated in a few key companies as a result of the high energy demands of proof of work. This can result in a small number of companies dominating the majority of bitcoin business operations.

Merits of proof-of-work consensus mechanism:

As a result, it is necessary to weigh the relative benefits and drawbacks of proof of labour in comparison to other systems, such as proof of stake.

• Most importantly, considering that Bitcoin has now been operational for more than ten years with no notable outages or cryptocurrency activities, proof of work may offer a higher level of security than alternative methods of consensus.
• Proof of work does provide the highest level of security and decentralization, but at a high cost: A substantial amount of energy is used by it.
• Such energy consumption and waste is a reasonable price to pay for the only consensus mechanism that has really been demonstrated to be robust at scale, according to everyone who appreciates bitcoin and thinks it’s a significant contribution to the development of money. In contrast, it’s essentially a scandal for anyone who continues to be dubious of cryptocurrency.

According to some estimations, proof of work causes the bitcoin blockchain to consume enough energy annually to power a country the size of Thailand. Additionally, it generates a lot of electronic waste in the form of mining equipment that is discarded in favor of ever-more-powerful models.

Some coins using the Proof-of-work consensus mechanism:

The following are some well-known cryptocurrencies that employ proof of work:

• The first cryptocurrency since its 2009 inception is Bitcoin. It established the idea of proof of work in cryptocurrencies, which many other coins would subsequently embrace.
• One of the first cryptocurrencies, or alternatives to bitcoin, is Litecoin (CRYPTO: LTC). It was introduced in 2011 and provided quicker transaction times because of its use of the Bitcoin source code.
• Based on the Doge meme, Dogecoin (CRYPTO: DOGE) is a cryptocurrency that was introduced in 2013. Despite its lighthearted beginning, it would eventually develop a devoted fanbase.

When early cryptocurrencies were developing, proof of work was the go-to consensus mechanism since it provided a secure, decentralized method of transaction processing. Proof of work is still employed by several large coins, despite proof of stake’s later emergence as a less power-intensive substitute.

Proof-of-work vs. Proof-of-Stake:

There are two primary consensus techniques for cryptocurrencies—proof of work and proof of stake—but there are crucial differences between them.

Both mechanisms verify incoming transactions before, including them in a chain. Participants in the network are known as “validators” instead of “miners” with proof of stake consensus protocol. One significant difference is that validators lock up predetermined quantities of cryptocurrency—their stake—in a smart contract on the blockchain rather than solving mathematical equations.They have the opportunity to verify fresh transactions and gain compensation in return for “staking” cryptocurrency. However, they risk losing all or part of their interest if they incorrectly validate false or fraudulent data.

More people can participate in blockchain systems as validators thanks to proof of stake. To stake cryptocurrency, one does not need to purchase pricey computing equipment or use a lot of electricity. You only require coins.

Some projects have even gone beyond PoW, by implementing Proof of Physical Work (PoPw). Decentralized Physical Infrastructure Networks (DePIN) projects combine real-world infrastructure to validate transactions on their network.

Bottom Line:

Of the two primary consensus processes for confirming transactions on blockchains, proof of work is the most widely used. The use of proof of work by miners helps to ensure that only valid transactions are recorded on the blockchain, albeit it is not without limitations.

By doing this, miners contribute to securing the blockchain against potential assaults that can result in financial losses for those operating blockchain-based enterprises.