Almost everyone has heard of cryptocurrency mining, but what exactly is it? Mining is nothing more than creating new blocks on the blockchain of Bitcoin and other digital currencies. To create blocks on the chain, however, you need a consensus on the network. The most popular method to achieve it is the Proof of Work algorithm.
The operation of cryptocurrencies is based on cryptography. This science involves secure communication between one entity and another by constructing and analyzing protocols that allow for privacy without third-party interference. In the case of cryptocurrencies, the key element of a transaction is its confirmation. This is where the consensus algorithm comes into play.
Proof of Work – what is it?
The most popular method of confirming transactions is the Proof of Work algorithm. PoW is a system that is primarily designed to protect and prevent attacks. The cryptocurrency market today is worth hundreds of billions of dollars, so every transaction made on the blockchain must be checked and verified to be considered safe.
Proof of Work is a cryptographic proof of work with zero knowledge. What is proof of work with zero knowledge? It is when one party is able to prove to another party that they have a certain piece of information without revealing its content. This is especially useful in authentication processes, particularly when there is a requirement for anonymity. That sounds like the definition of a cryptocurrency transaction, doesn’t it?
Mining race
As the name suggests, Proof of Work requires an amount of work that will later be rewarded. The confirmation of transactions is handled by miners. How is this done? Using high computing power, computers solve complex cryptographic calculations.
In short, miners compete with each other as to which one of them is the first to solve the problem (known as the hash). Each time a miner confirms a transaction through a successful calculation, they are rewarded with cryptocurrency from the network they are working on.
History of Proof-of-Work (PoW)
The Proof of Work theory was presented by Cynthia Dwork and Moni Naor in 1993, and the term itself was invented in 1999 by Markus Jakobsson and Ari Juels.
The use of the Proof-of-Work concept in finance was proposed by Hal Finney in 2004. The legendary cryptographer introduced his idea as the idea of “reusable proof of work”. 5 years later, his idea was implemented in the Bitcoin blockchain, and the recipient of the first transaction on the BTC network was Finney himself.
Such well-known cryptocurrencies as Litecoin, Monero, Bitcoin Cash and Ethereum have been based on the same consensus algorithm (although the team developing this cryptocurrency is still working on switching to Proof of Stake).
Pros and cons of Proof of Work
The Proof of Work algorithm has found its way into cryptocurrencies and is still used by many of them today for several key features:
- RELIABILITY – Proof of Work guarantees secure and hassle-free transactions, which has been proven by over a decade of use in cryptocurrencies.
- SCALABILITY – With a large number of miners, the Proof-of-Work algorithm is highly scalable and applicable to many applications. However, second-generation cryptocurrency originators are looking for other solutions because Proof of Work has limitations not found in other transaction confirmation algorithms:
- HIGH COSTS – The first argument of PoW opponents is that this algorithm requires a huge amount of energy. Many scientists believe that Proof of Work is a completely unnecessary waste of computing power. High energy expenditure also hinders cryptocurrencies from mass adoption.
- ATTACK 51% – To add malware to a blockchain based on Proof of Work, a hacker needs a computer with more than 51% of the network’s total computing power. While this is basically impossible for large cryptocurrencies, smaller PoW-based cryptos are vulnerable to this type of attack.
Alternatives to PoW
The flaws and limitations of the Proof of Work algorithm have cryptographers working on more methods to verify transactions. The most popular alternative to PoW is Proof of Stake (PoS).
In PoS algorithm, there is no miner competition as the creator of a new block is chosen by the algorithm based on the amount of staked coins. ‘Proof of Stake’ is also much less vulnerable to 51% attacks, as a hacker would need to have 51% of all the cryptocurrency created so far to carry out such an attack.
However, these are not all existing network consensus algorithms. Over time, the following have also been created:
- Delegated Proof of Stake (DPoS)
- Leased Proof of Stake (LPoS)
- Proof of Activity (PoA)
- Proof of Capacity (PoC)
- Proof of Importance (PoI)
- Proof of Burn (PoB)
- Proof of Weight (PoWeight)
- and many, many others.
Despite coming up with more consensus algorithm concepts, there are still cryptocurrencies being created based on the Proof-of-Work algorithm. This is mainly due to the fact that the practical application of this solution is known and verified. Although there are alternatives, PoW remains the most popular algorithm in cryptocurrencies and it looks like this will not change for a very long time from now.
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