Bitcoin and cryptocurrencies are ambitiously marching towards the new financial future. A change at a constitutional level expects solid foundations. In this case of cryptocurrency, protocols form the centrepiece. Blockchain network forms its original consensus on the idea of “Proof of Work” also known as POW. In this article, we will see what is proof of work and why it’s important.
What is Proof of Work?
Bitcoin isn’t the first system to implement the proof of network protocol. The concept was first introduced by Cynthia Dwork and Moni Naor in a 1993 journal article. The main purpose of POW system is to deter any Denial of Service attacks on the financial networks. The Bitcoin founder has adapted this system for the Blockchain networks revolutionizing the financial sector.
In terms of cryptocurrency, Proof of Work is a system that uses computational power to verify transactions and produce new blocks to the blockchain. Miners compete against each other to verify transactions on the network in exchange for incentives, which is Bitcoin or other cryptos which the miner is mining. The POW system uses difficult mathematical functions like hashes with an easy-to-verify possibility.
How is Proof of Work Implemented in Blockchain?
Bitcoin runs on a public ledger and all the transactions are stacked in the blockchain. So, whenever a new transaction takes place, it needs to be placed in a new block. Bitcoin Miners solve complex mathematical problems (proof of work) in the form of hashes (like SHA256) and form new blocks for the transactions to take place. The complexity depends on the number of users in the network, the current power and the network load. If the complexity increases, the transactions take more time. The problems are complex and hard to compute but the solution needs to be easily verified by other nodes on the network. So, it should be easy-to-verify the output given an input.
Once the block is generated, the transactions are placed in this block and confirmed. Then your transaction would take place. A lot of miners compete with each other to solve the next mathematical puzzle and whoever solves it first will get the incentives as defined in the protocol. This is how the Bitcoin network works and the incentives are given to those who show proof of work, which is solving complex mathematical functions or puzzles.
Disadvantages of Proof of Work
Mining requires a lot of computation power and miners usually setup specialized rigs with loads of GPUs. Sometimes, the investment in hardware and the power isn’t worth the returns. Due to the huge investments, mining is becoming centralized to some mining pools which oppose the idea of centralization of the system.
The main advantage of POW is that no single person or group can possibly form an attack on the network. An efficient attack requires a lot of computational power but it isn’t worth the investment and time. However, if more than half of the network is in disagreement, it can lead to a 51% attack. In this case, the majority users get control over the network and control generating new blocks and receive rewards as they’re able to prevent other miners from competing. They can even reverse transactions.
In reality, a 51% attack is not profitable as no one organization can pull it off. Also, once the word gets out, the value of the coin goes down because of the compromised network. So, there would be no point of controlling a chain that has no value.