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  • BTC Dominance: 38.21%

What is Proof of Work? Everything you need to know about PoW

The very first blockchain ever uses the Proof of Work (PoW) algorithm. It is therefore also the best-known consensus algorithm at the moment. Because miners can validate blocks, they earn money. This keeps the blockchain network running continuously, day and night. Do you already know what Proof of Work is?

What is Proof of Work?

With the Proof of Work algorithm, the participants of the blockchain receive a reward in the same cryptocurrency for which they are solving the transactions. By adding a new block to the blockchain, the transactions are validated. We call this whole process mining, which means that miners are mining new blocks (adding new blocks).

For this, the miners have to provide the solution of the arithmetic problem, showing that there are no errors in the transactions. Many major cryptocurrencies are based on the Proof of Work method. Among them is Bitcoin with the SHA-256 algorithm, Ethereum with Ethash, Litecoin with Script and Monero with CryptoNight.

Although the Proof of Work algorithm is used by the largest cryptocurrencies, this payment method has some drawbacks. Solving the arithmetic problems takes a lot of time and energy and is therefore very cost-intensive. For this reason, miners and graphics card manufacturers are always trying to develop new devices to meet the high demands. Due to the increasing difficulty of the computer tasks, normal graphics cards are hardly used anymore. Rather, so-called ASICs are used, which have a high level of data processing. Combined with cheap cooling and cheap electricity, mining for nodes can be very lucrative.

If you are a beginner in the world of cryptocurrencies, mining Altcoins is not recommended. It is difficult to mine Altcoins, when you compare it to mining Bitcoin. That is why mining Bitcoin is recommended for beginners.

How does Proof of Work work?

Network participants have to solve a relatively complex puzzle with their hardware in the Proof of Work algorithm. Whoever finds the correct solution can use it to prove that they can add a new block to the chain of blocks.

Here too it is relatively easy to check whether the solution is correct. After solving the puzzles, the miner generates a hash from the solution and the contents of the block. If this hash meets certain conditions, it will be checked by other nodes on the network. If these nodes confirm its validity, the associated miner will receive its reward. The block is considered validated and can be added to the blockchain.

Depending on how many participants in the validation are working or how much computing power is being used, the complexity of the task is artificially increased to deliberately delay the generation of new blocks. That is why it takes time for blockchains to validate new transactions when the blockchain uses the Proof of Work algorithm.

The difference between Proof of Work and Proof of Stake

Another well-known consensus algorithm is Proof of Stake . Unlike the Proof of Work method, the Proof of Stake does not create the cryptocurrency through complicated math puzzles.

A node will first have to bet money, which is then taken into custody by the network. This is referred to as the so-called strike. The more money someone bets, the greater the chance that they will be allowed to validate new blocks. Also, the reward is higher when more money is wagered. The moment someone does not do a good job, their effort can be taken away. In this way, the network wants to guarantee that someone does their best and keeps themselves to the set agreements, so that the network can benefit from this.

If you compare this trade-off with the financial world, you could also speak of well-known interest rates. Depending on the cryptocurrency, these vary between two and ten percent per year. This may sound like a lot at first, especially when compared to a mortgage bank loan agreement or an equity investment. Due to the strong fluctuations of most cryptocurrencies, an experienced user can easily earn ten to twenty percent profit per month.

Cryptocurrencies that use the Proof of Stake method only make up a small part of the market capitalization. The most famous coins are Stratis , PivX and Reddcoin.

The benefits of Proof of Work

The consensus mechanism protects the blockchain from attacks and incorrect transactions. Attacks would require a lot of computing power and thus cause high costs in advance, without guaranteeing success or a correspondingly high return. This doesn’t rule out attacks, but it makes them relatively unlikely.

In addition, the Proof of Work algorithm artificially slows down the system, as only a certain number of blocks can be generated per hour. This helps the system protect itself against DDoS attacks.

Disadvantages of Proof of Work

In the Proof of Work algorithm, incorrect information is detected by comparing it with the rest of the data on the blockchain. The information on the blockchain could thus be infiltrated by an absolute majority. This opens up the unlikely possibility of a so-called 51% attack.

Mining pools that provide more than 50 percent of the total computing power can compromise the security and stability of the network. With Bitcoin, the chance of such an attack is very small, as the miners operate all over the world. Should a large group or country such as Russia or China decide to start mining the transactions, the developers of the blockchain should provide a solution. Something like that would be possible.

In addition to that danger, the problem of energy consumption is also known. Bitcoin’s energy consumption is increasing every year, as the number of miners continues to grow and more and more people use Bitcoin. Experts in this field currently assume an electricity consumption of 16.36 terawatt hours per year. There are also many Bitcoin miners in China, where green energy is not yet known. Most energy is generated by coal-fired power stations. This means that Bitcoin is anything but good for the environment.


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