What is Proof of Work (PoW)? Why is this mechanism needed?

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In our article about bitcoin mining, we mentioned the Proof of Work concept. So what is it?

Proof-of-Work(PoW) is one of the three most common consensus algorithms using in the blockchain network. The others are Proof of Stake (PoS) and Delegated Proof of Stake (DPoS). The error-free and secure operation of the blockchain system depends on these consensus mechanisms. They are used, particularly in the mining process.  Now, we will explain in detail why is the PoW mechanism needed and how it works.

Introduced in 1993

Since the early 1990s, the use of e-mail has become widespread. This situation has continually exposed e-mail systems to spam attacks. Therefore, an absolute solution to this problem was required.

Although it became popular with Bitcoin, the idea of Proof-of-Work was introduced in 1993 by academics Cynthia Dwork and Moni Naor. They published a science paper, “On Memory-Bound Functions For Fighting Spam.” The main idea of the article focuses on the numerical approach to prevent spammers and denial of service attacks.

“If I don’t know you and you want to send me a message, then you must prove that you spent, say, ten seconds of CPU time, just for me and just for this message.” 

The idea emerged in 1993, but the term “Proof of Work” was introduced by Markus Jakobsson and Ari Juels. In 1999 they published a document named “Proof of Work and Bread Pudding Protocols.” As the name suggests, proof of work is a proven protocol. It confirms that the verifier made a certain computational effort within a given time frame. The concept was later adapted for money by Hal Finney in 2004 with the idea of ​​”reusable proof of work.” In 2008, with Satoshi Nakamoto’s Bitcoin white paper, the long-existing concept of PoW became even more prominent.

Because the blockchain was a distributed, decentralized network, it had to establish a system for verifying transactions. The proof-of-work consensus algorithm fulfilled this need for the network. Without the need for a third party, the network has created a system. It make sure that the transaction is valid and someone is not trying to spend the same money twice. 

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How does the PoW algorithm work

During the mining process, nodes (miners) compete among themselves to validate that the information contained in each transaction block is correct. The network assigns cryptographic puzzles to nodes that are time-consuming to figure and require large amounts of computing power. This entire process is known as mining. This challenging puzzle must be solved to get a financial reward.

On the Bitcoin blockchain, the Hashcash proof-of-work protocol is using.

No-one knows the hash of the last recorded block in the ledger. It has to be found by the miner, and that’s the cryptographic puzzle. Miners make millions of attempts to find the right hash for the transaction block. A slow computer can take hundreds of years to do this. But computers with a high processing power can do it in minutes. Additionally, as the processing power of the network increases, solving puzzles becomes more difficult. 

A hash (or cryptographic hash) is a long number that acts as a digital fingerprint of any block. In Bitcoin, the SHA-256 algorithm is using to generate a fixed-length number of 64 digits. Miner uses the hash function. They change the random number(nonce) until getting a string that has a certain number of zeroes in front of it. 

After a miner finds the valid hash, he/she broadcast the results to the entire network for validation. Including the address of the previous block, all transactions in the ledger, and nonce. Other nodes in the blockchain network automatically check whether the results are valid. If the results are correct, other nodes confirm to add the block to the blockchain. Nodes will stop building this block and move on to the next block.

Shortcomings of Proof-of-Work protocol

The proof of work consensus algorithm also has several disadvantages to consider.

  1. The process wastes a lot of energy and time
  2. 51% attack – hypothetical possibility that malicious actors(single entity or organization) can control the majority of mining power in the network
  3. Miners come together to gain economies of scale, and the decentralized system begins to centralize.

The proof of work based on the mathematics of cryptography. It is evident that the participant validating the block has invested significant computing power to do this. Regardless of some of its current drawbacks, we have to admit that proof of work is a system that provides security and consensus throughout the blockchain network.