What Is Proof of Work? Guide to How Bitcoin is Maintained

computers and servers stacked on each other to represent computing power in proof of work

Proof of work keeps the bitcoin network going. For beginners to mining and the bitcoin, proof of work might come off as confusing. In this article, we answer the question “what is proof of work” and show you the alternatives, limitations, and how it affects you as a cryptocurrency investor.

What is Proof of Work?

Proof of Work is the algorithm that protects various cryptos, including Bitcoin. It requires members (miners) to spend time and effort solving mathematical puzzles to validate transactions.

Most currencies have a central institution or leader that keeps track of all users and their balances. However, there is no such authority in control of cryptocurrencies such as Bitcoin. Proof of Work is required to make the digital money work without a firm or government in charge.

Bitcoin is a decentralized virtual currency that provides peer-to-peer value transfer without the use of a central intermediary. It runs on a protocol known as the blockchain.

Why Is Proof of Work Needed In Bitcoin and Its Blockchain?

It is difficult, costly, and time-consuming to create a proof-of-work verification, but it is simple to validate. Bitcoin is safe because attacking the network is computationally impossible.

The protection of Bitcoin’s transaction history requires proof-of-work while expanding the complexity of changing data over time.

The safety requirement is Proof of Work (PoW), which restricts forgery and allows credibility. This safety measure guarantees that independent data processors, known as miners, cannot fabricate information about a transaction. 

Finally, proof of work is essential for developing a distributed clock that allows miners to openly enter and exit the network while keeping a steady operation rate.

What Is Hashcash Proof of Work?

Hashcash is a proof-of-work method. It was originally developed to prevent email spam and denial-of-service attacks. However, it is now best known for use in bitcoin and other digital currencies mining algorithms.

The Bitcoin cryptocurrency network uses a separate hash-based Proof of Work challenge to support competitive Bitcoin mining, unlike Hashcash in mail apps, which relies on recipients manually setting an amount of work to dissuade fraudulent senders. 

A Bitcoin miner uses computer software to accumulate unconfirmed Bitcoin transactions from network users. These can be combined to make a “block” and earn the miner compensation, but the network will only accept a block if its hash meets the network’s difficulty target. 

As with Hashcash, miners must use brute force to find the “nonce” that produces an acceptable hash when included in the block.

What Is Proof of Stake (PoS) In Cryptocurrency?

According to the Proof of Stake (PoS) concept, a person can validate block transactions based on the number of coins they own. It means that the more coins a “staker” or validator holds, the more staking power they have.

Ethereum developers are working on Ethereum 2.0, a set of upgrades that will run on Proof of Stake and merge with the Ethereum mainnet. Proof of Stake on Ethereum 2.0 seeks the same result as proof-of-work – to safely authenticate transactions on the blockchain.

However, whereas PoW miners devote hardware resources, such as large, expensive computers, to network security, PoS validators devote their cryptocurrency. 

To be eligible to verify transactions in a block and receive the associated rewards in PoS, validators must lock up, or stake, at least 32 ETH that they cannot spend. The blockchain secures the network by utilizing that locked-up crypto.

Click to learn how to use staking to earn cryptocurrency passively.

Why Do Cryptocurrencies Need Proof of Work?

an image of bitcoin, ethereum, zcash, and other cryptocurrency logos printed on coins

Bitcoin transactions are encrypted in a data structure known as a blockchain. Objectively, a chain of blocks makes the blockchain. Blocks, which make up transactions, are generated roughly every ten minutes.

Miners order transactions within blocks based on the optional fee a user includes as a bonus. The higher the chance of retaining the transaction, the higher the cost. Anyone can run a mining node since mining is the process of creating a block. Each miner has a duplicate of the same blockchain.

Blockchains, like cryptocurrency networks, require some method of achieving both consensus and security because they are decentralized and peer-to-peer by design. Proof of Work is one method that makes attempting to overtake the network resource-intensive. 

Other proof mechanisms, such as Proof of Stake (PoS) and Proof of Burn (PoB), use less resource-intensive but have other disadvantages. 

The network and the data stored on it would be vulnerable to attack if there was no proof mechanism in place.

Limitations Of Proof of Work

There are two significant drawbacks to the proof of work system. The first disadvantage is that they waste energy, which is harmful to the environment. 

Computers consume more electrical power to perform additional computational work. It counts as a significant amount of extra energy usage.

Nevertheless, bitcoin doesn’t seem to consume as much energy as we are told or taught to believe; the statistics of what energy the Bitcoin network consumes tell otherwise. According to a report on cryptocurrency mining published in November 2018, around 80% of the electricity used in mining is green energy. In some situations, Bitcoin mining operations use surplus energy that a country’s power grid would otherwise be unable to distribute.

The second major disadvantage of proof-of-work blockchains is security. Proof of Work is only secure if there is a large network of miners competing for block rewards. The 51% attack will occur if the network is small. It means a hacker can gain most of the network’s computational power if they can accumulate 51% of Bitcoin’s mining hashrate.

That can allow them to flout the rules to double-spend coins and block transactions. Manipulation of the Bitcoin blockchain is nearly impossible in today’s circumstances. There are, however, thousands of smaller proof-of-work blockchains that are still highly vulnerable to 51% attacks.

Proof-of-Work Alternatives

There are other proof of work alternatives. We looked at proof of stake earlier; these are the others:

1. Proof of Burn (PoB)

2. Proof of Elapsed Time (PoET)

3. Proof of Authority (PoA)

4. Proof of Capacity (PoC)

Proof of Burn (PoB)

an image of slimcoin proof of burn website

Proof of Burn is a new alternative to Proof of Work. However, it operates on a similar platform to Proof of Work.

The process is easy to perform. Instead of putting the coin into computer equipment, the owner burns it. The address gets the coins that are irretrievably lost. By doing so, the owner has the chance to mine on the system. This process is based on a random selection.

To put this system in place, miners can burn either the native currency or the currency of a different chain, such as Bitcoin. The more bitcoin you burn, the more likely you are to qualify for the selection process.

There is a side of an argument that claims that Proof of Burn promotes a project’s long-term commitment and time frame. Investors that hold their coins for the long term are less likely to sell or spend their money, resulting in higher price stability for the coin.

While supporters of Proof of Burn affirm that it does not waste resources, critics contend that it does waste resources in the sense that the resources necessary to create the burnt coins are lost.

Like the proof of stake consensus, there is also a problem where individuals with many currencies continue to accumulate more coins. It is a problem of the affluent getting richer.

Proof of Burn is also known as a high-risk system since no guarantee exists that a user would ever recover the maximum value of the coin destroyed.

Slimcoin (SLM) and Counterparty (XCP) uses Proof of Burn to seed their token.

Proof of Elapsed Time (PoET)

Users do not have to complete any cryptographic puzzles, unlike Proof of Work.

To ensure a random looter creation in Proof of Elapsed Time, you use TEE (Trusted Execution Environment). Two crucial elements must be ensured by the PoET network consensus method. First off, the technique assures that the participating nodes choose a truly random time rather than a shorter duration picked by the participants on purpose to win. Next, the process ensures that the winner has completed the required waiting period.

The workflow is essentially the same as Bitcoin’s Proof of Work (PoW) algorithm’s consensus method but without excessive energy consumption. Rather than being resource-intensive, it allows a miner’s processor to rest and transition to other activities for a set amount of time, increasing productivity.

The disadvantage of this method is that you must rely on Intel Corporation, the firm behind the development of PoET, which is similar to entrusting a third party. In the case of bitcoin transactions, you avoid using a third party.

Proof of Authority (PoA)

A screenshot of Vechsin proof of authority website

Proof of Authority (PoA) is a consensus technique that empowers a limited group of blockchain users to validate transactions and interactions with the network and update the network’s more or less distributed registry.

It works like this; one or more validating machines generate each new block of transactions included in the Blockchain, depending on the scheme selected. Based on the Blockchain design, the new block can be approved directly without verification, by a vote of the block generators, or merely by a majority.

Presently, VeChain uses Proof of Authority.

Proof of Capacity (PoC)

You pay with hard drive space in the case of Proof of Capacity. The majority of the alternative systems currently available operate on a pay-to-play basis. 

The hard drive space you possess will determine the chance of mining the next block and earn a bonus. It appears similar to Proof of Stake, where the validator with the most coins in their wallet receives the reward.

The algorithm generates plots in Proof of Capacity, and plots are large sets of data. The hard drive saves the data sets. 

One of the advantages of Proof of Capacity is that there is a significant level of diversification. It is due to the low entry barriers to getting a hard drive. They are usually inexpensive, allowing more miners to come on board.

To have the chance of finding the next block in the chain, you must have more plots on the hard drive. To improve one’s chances of selection, one should invest in purchasing hard drive space.

Currently, Signum Network, previously Burstcoin uses Proof of Capacity.

Conclusion

Although the cost of this consensus algorithm causes us to consider other possible ways to validate transactions and keep the network running efficiently, proof of work does manage to protect the bitcoin and the bitcoin network from bad miners. 

It is no surprise that different consensus algorithms are already in use in various blockchain projects. Proof of stake is the most notable competitor of proof of work, and it works pretty well for other cryptocurrencies, notably Ethereum. Maybe bitcoin will adopt it at some point.

Remember that investing in bitcoin, other cryptocurrencies, and trading on exchanges entail risk. Before coming to any conclusions, do your due diligence and financial research on the digital money markets. If you’d like to schedule a consultation, click on this link.

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