Proof of Work, or PoW, is a consensus mechanism used by various blockchains. Bitcoin was the first blockchain to use Proof of Work, after which it was also adopted by blockchains like Litecoin and Ethereum
The network of a Proof of Work blockchain consists of miners. They compete with each to be the first to have validated all transactions, in order to subsequently be able to add a new block to the blockchain. This process is called ‘mining’. The winning miner receives a reward in the form of the cryptocurrency for which they are mining.
Miners in a PoW network compete with each other to be the first to complete. In order to validate transactions, they need a lot of computer power. Computer power can be increased by using better hardware. In addition, if multiple computers are used, sufficient electricity must be available. It requires an enormous amount of energy to participate in a large PoW network as a miner.
How does Proof of Work (PoW) consensus work?
With Proof of Work, miners must solve a complex cryptographic puzzle in order to validate all transactions. A solution already exists, the miners just have to find it. Finding the right solution is an arbitrary process, and a lot of computer power is available to find the solution.
The Proof of Work hash function, also called block header, is the correct solution of the abovementioned complex cryptographic puzzle. The solution consists of a 64-digit hexadecimal number. This number, the block header, must be smaller than or equal to the difficulty factor. The difficulty factor can be regarded as a variable number that determines how difficult it is to find a solution. When a lot of miners are active, the difficulty factor will increase.
This is because with miners, it becomes ‘easier’ to quickly find a solution. For security reasons, it always has to take an X number of minutes before a solution is found, and the difficulty degree guarantees that a solution is not found too quickly. Bitcoin’s difficulty rate is adjusted every 14 days. Satoshi Nakamoto has thus ensured that not all Bitcoin can be mined in a relatively short time.
If the block header is larger than the difficulty factor, the Proof of Work hash function will be invalid. In other words, if the difficulty factor falls, there will be fewer valid solutions that are numerically lower than the difficulty factor. In other words: the difficulty rate has increased, since it is now more difficult for a miner to guess a valid solution that numerically is lower than the difficulty factor.
When a proposed block header is numerically higher than the difficulty factor, the miner must adjust the block header and try again. This process will continue to be repeated until the miner is the first to find a result that is numerically lower than the difficulty factor. The miner can now add his block to the blockchain, and will receive a reward in the form of new coins and the transaction fees of all transactions included in his block.
Finding the correct hash function
Only the miner who is the first to find a valid Proof of Work hash function will be entitled to add his block to the blockchain. All miners globally thus compete with each other to be the first to find a valid Proof of Work hash function for the next block. This is why calculating power is so important, as it is only the first miner who will receive a reward when he can add his block to the blockchain.
The name Proof of Work is based on the underlying process. The result of the Proof of Work hash function is unpredictable. A miner is therefore unable to predict this hash function in advance, so that every miner has to try all solutions one by one. A valid result is therefore proof that the miner has invested time, electricity costs and maintenance costs in finding a solution.
What are the pros and cons of Proof of Work?
It is not without reason that many blockchains use Proof of Work. It has a number of important advantages that make it an attractive consensus algorithm. However, over the past few years, a number of disadvantages of the PoW algorithm have also come to light. Below are the most important pros and cons.
- Secure Because it costs a lot of energy and money to validate transactions, the network is very safe. For example, it is almost impossible to execute the same transaction multiple times.
- Proven algorithm This consensus algorithm has already proven itself on a large scale in the past years. It is used by Bitcoin, which is one of the largest blockchains and which has demonstrated how will this algorithm works.
- Decentralized Anyone can participate in a PoW network, and consequently the network can grow quickly and easily. This ensures that networks are very decentralized.
- It costs a lot of energy to add new blocks. Every miner uses energy, while the work of just one miner will be used. If 10,000 miners are at work, the work of 9,999 miners will have been for nothing, even though they used energy. Proof of Work is therefore often regarded as a non-sustainable algorithm.
- Slow and limited scalability. It can take a lot of time to validate transactions. There are also limits on the scalability of the blockchain. As a result, the blockchain can no longer process transactions when demand for the blockchain increases, as a result of which users have to wait longer for the validation of their transaction.
- Can work centralized due to limited scalability. A minor must have new and often expensive hardware. Consequently, there is a group of miners, so-called mining pools, who bundle their computer power and share block rewards with each other. This can result in blocks only being added by those same groups, making the network more centralized.
Which blockchains use the Proof of Work algorithm?
There are various blockchains that use the Proof of Work consensus mechanism, the most important of which we’ve listed below.
Bitcoin was the first blockchain to ever use Proof of Work as a consensus algorithm. In the meantime Bitcoin’s network has become so large that it has become almost impossible for individual miners to participate in the network As a result, there are multiple mining pools within Bitcoin’s network. These are groups of miners who bundle their forces in order to deliver more computer power together.
It is therefore sometimes also said that Bitcoin’s network isn’t quite as decentralized anymore as it was once intended. It is usually the same mining pools that can add new blocks to the blockchain.
The first version of Ethereum, also called Ethereum 1.0, used the Proof of Work algorithm. However, in 2021 Ethereum started its upgrade to Ethereum 2.0, which will see them switch to Proof of Stake. The upgrade will take over a year and is divided into several stages.
The reason to switch to Proof of Stake was that the algorithm is more sustainable and scalable, which are the two downsides we mentioned earlier on for Proof of Work. Ethereum’s founders have said the sustainability and scalability form major problems for the blockchain’s operation.
Bitcoin Cash is a hard fork created from Bitcoin’s blockchain. This hard fork was created when there was some disagreement between miners about the SegWit update. Bitcoin Cash’s blockchain still uses Proof of Work, although the blocksize for Bitcoin Cash is much greater than for Bitcoin. This has resulted in an increase in scalability.
Shortly after the creation of Bitcoin, Litecoin was created as a hard fork of Bitcoin. Litecoin was launched to better serve as a payment method. Because some changes were made to the blockchain, more transactions can be processed at better rates.
Monero is also called the ‘privacy blockchain’, because it highly values its users’ privacy. For example, it is possible to carry out a transaction on this blockchain fully anonymously. Like many other blockchains, Monero uses Proof of Work.
Proof of Work is the first and commonly used consensus algorithm for blockchains. It was created before Bitcoin even existed, but was applied on a large scale for the first time within the Bitcoin protocol. Within a PoW network, miners compete with each other to be the first to process all transactions, after which the winner can add a new block to the blockchain. The winner pays a reward for this, comprised of transaction fees by the users, along with new coins released. This is called ‘mining’.
The most important advantage of Proof of Work is that it is a safe consensus algorithm that has already proven itself on a large scale. It requires a lot of energy and money to mine, making it difficult to manipulate the network. However, this is also the downside of Proof of Work. It requires a lot of electricity to maintain the network, as a result of which Proof of Work is anything but sustainable.
Various other blockchains also use Proof of Work. These include Bitcoin, Litecoin, Bitcoin Cash and Monero. Eerder is currently still using Proof of Work, but this blockchain is transitioning to Proof of Stake.