What is Proof of Work?
One of the main properties of blockchain technology, the basis of cryptocurrencies, is decentralisation. This means that all nodes in the blockchain network are equal, and there's no central authority to decide which transactions are valid and which aren't. But how, then, do the network participants solve this issue? They need to reach a consensus. This is done using a mechanism called a consensus algorithm.
A consensus algorithm is a set of mathematical rules that allow nodes in the network to agree while eliminating invalid and fraudulent transactions. The oldest and most well-known consensus algorithm used in cryptocurrencies is Proof of Work.
In this article, you'll learn what Proof of Work is, how it ensures the blockchain functions properly, what advantages and disadvantages it has and what alternatives to Proof of Work exist.
The proof-of-work also solves the problem of determining representation in majority decision making. If the majority were based on one-IP-address-one-vote, it could be subverted by anyone able to allocate many IPs. Proof-of-work is essentially one-CPU-one-vote. - Satoshi Nakamoto.
Proof of Work explained
Proof of Work (PoW) is a consensus algorithm that makes the blockchain network nodes do very complex computational work (algorithm calculation) to confirm transactions.
Other network nodes can easily and quickly verify their result. The first node to successfully complete all the required computations receives a reward from the blockchain network. Because of this, nodes compete for the opportunity to become the first and receive the reward.
Although the Proof of Work algorithm currently has a strong association with cryptocurrencies, an algorithm similar to it was initially proposed in 1993 in a scientific work devoted to combatting spam. The term "Proof of Work" itself first appeared in 1999. However, it was only with the advent of Bitcoin and the beginning of the cryptocurrency era that this algorithm found widespread practical application.
How the Proof of Work algorithm works
Proof of Work blockchains use miners to verify transactions and create new blocks. To reward miners for their work, the network must establish rules to select a miner who will have the right to generate the next block in the chain.
Here's how the algorithm works:
- Blockchain network users form transactions by sending cryptocurrency to each other.
- Transactions are combined into blocks.
- Miners verify the validity of transactions within blocks.
- The miners then solve a complex mathematical puzzle by calculating the correct hash for the block. Those calculations require a lot of computing power.
- A reward is given to the first miner to solve the puzzle.
- The blocks with verified transactions are stored on the blockchain.
Advantages and disadvantages of Proof of Work
Proof of work effectively protects the blockchain network from hacking attempts by making them very difficult and costly. Moreover, the more miners work in the network, the more resistant the network becomes to hacking attempts. In addition, this consensus algorithm is the oldest and most tested through practice.
Nevertheless, Proof of Work also has some notable drawbacks that led to the development of alternative consensus algorithms.
- High electricity consumption and useless computing. Miners consume huge amounts of electricity, but the calculations they make don't go anywhere except for the network's needs.
- Significant computing power is required to keep the Proof of Work blockchain working. For example, you can't mine Bitcoin on cheap video cards; it requires powerful, expensive specialised equipment known as ASICs, which aren't suitable for performing any other tasks.
- As the network and the calculations become more complex, the cost of mining equipment ceases to be affordable to ordinary users. Only large communities of miners or wealthy people and companies with powerful mining farms can mine blocks and confirm transactions. This increases centralisation as owners of large mining capacities begin to dictate the rules of the network.
- Vulnerability to a 51% attack. If an attacker controls more than 50% of the network hash rate, they can tamper with, cancel or change transactions for their own purposes. Likewise, they can perform other malicious actions with the blockchain. Since the hacker's hashing power is higher than the rest of the network's in this scenario, the hacker's chain version will be accepted. While attacks like these are difficult to carry out for popular cryptocurrencies like Bitcoin due to the very high hash rate, the threat is very real for less popular cryptocurrencies.
Advantages and disadvantages of the Proof of Work algorithm
High level of protection against hacking attempts
High energy consumption
It's the oldest and most time-honoured of all consensus algorithms
The need for huge computing power
Increase in network centralisation
Vulnerability of blockchain to 51% attack
Proof of Work vs Proof of Stake
Due to the problems mentioned above, the blockchain industry is trying to develop alternatives to Proof of Work, the first of which was the Proof of Stake (PoS) consensus algorithm. Proposed in 2011, it was first used in the Peercoin cryptocurrency.
Unlike Proof of Work, Proof of Stake doesn't require any calculations. Those who wish to add a block and receive a reward are selected randomly from among the users who have reserved ("staked") a certain amount of the respective cryptocurrency for this purpose. The probability of being selected depends on the stake's size and other indicators, such as the stake's age. You can learn more about the Proof of Stake algorithm in our article on the topic.
With its features, the Proof of Stake algorithm solves the major problems inherent in Proof of Work. Thanks to the lack of computation, the Proof of Stake blockchain doesn't require expensive mining equipment or large amounts of electricity to function, which, in turn, prevents centralisation. A hacker would need to accumulate more than 50% of a cryptocurrency to carry out a 51% attack, making it pointless since they would incur the greatest losses.
That said, Proof of Stake has its own drawbacks. The relation of the chance of getting a reward to the size of the stake incentivises users to accumulate coins instead of using them for payments. Also, a small group of major coin holders may dictate their rules to the entire network. Moreover, cryptocurrency developers based on this algorithm have to solve the initial coins distribution problem since, to stake coins, they must first be obtained from somewhere.
Cryptocurrencies that use Proof of Work
Proof of Work is currently one of the most common consensus algorithms for cryptocurrencies.
Bitcoin and Proof of Work
Bitcoin, the first cryptocurrency, was also the first practical implementation of the Proof of Work algorithm in the blockchain industry. In the Bitcoin protocol, the Proof of Work is based on the SHA-256 hashing algorithm. The mining difficulty adjusts after every 2016th block. Average block generation time is 10 minutes.
Ethereum and Proof of Work
Vitalik Buterin, the developer of Ethereum, originally wanted to use the Proof of Stake algorithm, but due to its inherent problems, he was forced to use the more tried and tested Proof of Work algorithm. Despite this, he planned to completely abandon PoW and switch to PoS as soon as these problems were solved. Although the lengthy transition process has been postponed many times, it is now underway. However, the completion date is still unknown.
In the Ethereum protocol, the Proof of Work algorithm is based on the Ethash hashing algorithm. The average block generation time is 13 seconds.
Other Proof of Work altcoins
It's impossible to list all the cryptocurrencies using the PoW algorithm within this article, so we'll keep to only the most noticeable ones.
Cryptocurrencies with PoW consensus algorithm
An analogue of Bitcoin with faster and cheaper transactions
Bitcoin Cash (BCH)
A Bitcoin fork with increased block size and reduced time between difficulty adjustments
A cryptocurrency with increased anonymity based on the CryptoNight hashing algorithm
Ethereum Classic (ETC)
An Ethereum hard fork
Binance Coin (BNB)
The token of the Binance crypto exchange
A cryptocurrency for small payments with fast and cheap transactions. Originally created as a joke
An anonymous cryptocurrency
Bitcoin Gold (BTG)
An ASIC-resistant Bitcoin fork with increased decentralisation
An anonymous cryptocurrency. Supports several hashing algorithms. Based on the Bitcoin blockchain
Cryptocurrencies without the Proof of Work algorithm
The inherent drawbacks of the PoW algorithm encourage blockchain developers to look for alternatives. In addition to the previously mentioned Proof of Stake, many alternative consensus algorithms have been developed. Here are the most popular ones.
- Delegated Proof of Stake (DPoS) is a consensus algorithm in which the right to confirm blocks is delegated to a group of people elected by voting. The weight of the network participants' votes depends on the number of coins in their possession. It's used in EOS (EOS) and Lisk (LSK).
- Proof of Activity is a mixed approach that combines Proof of Work and Proof of Stake algorithms. An example of using this algorithm is Esper (ESP).
- Proof of Capacity is a consensus algorithm based on using free disk space on hard drives to place solutions to a cryptographic problem. This means that the chance of successfully generating a block is proportional to the volume of allocated disk space. It's used in Storj (STORJ) and Burst (BURST).
- Proof of Burn is a consensus algorithm based on the principle of "burning" coins. With this algorithm, miners send coins to an address that is impossible to withdraw them from. For doing this, miners get a constant chance to generate a block and receive a reward for it. The likelihood of this happening increases in proportion to the number of coins burned. Such an algorithm is not very good at the initial stage of cryptocurrency development, but it can be effective at later stages. Proof of Burn is used in Slimcoin (SLM) and Counterparty (XCP).