Proof of Work (PoW) is a system initially employed to prevent malicious or frivolous computing power uses and reworked as a digital currency consensus mechanism in 2004. Several cryptos, including Bitcoin, have chosen PoW as their consensus mechanism. It is a proven system to ensure the security of transactions on the Bitcoin network. This article will introduce you to consensus mechanisms, explain what PoW is and how it works, including an example, provide an overview of mining, and finally explain some PoW issues.
To understand PoW, we must first understand consensus mechanisms, also known as consensus protocols or algorithms. A consensus mechanism is a way a distributed system (a network of computers) agrees on a source of truth to stay secure. In centralized systems, this source is decided by a controlling entity, but with a distributed system, many authorities, called nodes, must cooperate to maintain the network. The system requires a computational mechanism by which nodes come to an agreement or consensus of both the most recent and accurate record of data across the system. Consensus mechanisms have established consensus among database nodes, application servers, and other enterprise infrastructure for decades. More recently, new consensus mechanisms have been developed, allowing crypto-economic systems (Bitcoin/Ethereum) to agree on the state of the network while also preventing hacks where the consensus is compromised by a hacker that controls “51%” of the network.
Courtesy of researchgate.net
So, What is Proof of Work?
Proof of Work (PoW) is a system that requires a feasible amount of work to deter malicious computer power usage (denial of service attack or spam emails). In 2004 Hal Finley reworked the concept to be used for digital currency transactions applying the SHA-256 algorithm. In 2009 Bitcoin made the first use of the Finley PoW concept.
The SHA-256 algorithm is a patented cryptographic hash (a long string of numbers) function created by the National Security Agency in 2001 that outputs a value that is 256 bits long.
A blockchain network’s users can transfer their digital tokens. A decentralized ledger gathers all these transactions into sequential blocks, but the confirmation of transactions and arranging of blocks must be a careful and secure process to prevent anyone from spending their holdings more than once. The ledger is public and needs to be consistent across the network. This process of creating blocks of transactions is completed by network nodes called “miners”. PoW is a complicated mathematical puzzle having the possibility to prove the solution easily. The network’s miners compete to solve the PoW mathematical puzzle (the solution is a correct hash), to confirm and produce blocks, and for this service, miners receive a reward. The expense of energy by the miners is meant to prevent anyone from gaming the system. This process removes the need for a trusted third party.
Graphic courtesy of Coin Telegraph
Tampering of blocks is prevented by blockchain’s public nature and any altered version would be rejected by the participant nodes. The nodes can detect tampering via hashes which are the Proof of Work result. When data is supplied to a hash function (like SHA-256), a single hash will be returned; the amount of the input data does not matter; the hash returned will be the same length. The most minute change to the input data will result in an incorrect output hash. The data input cannot be derived from the hash itself (going in the reverse direction); the hash is only a way to confirm that the input data matches the original data.
Each block’s hash includes the hash of the previous block (Block n will have n-1’s hash, see graphic below). This inclusion increases security and prevents any block violations.
Graphic courtesy of Coin Telegraph
The Bitcoin network sets a level of difficulty for processing or “mining” the new hash to take approximately 10 minutes. This is done by creating a hash “target.” The target is made harder to hit or “lower” by having fewer valid hashes and making its generation harder by creating a hash starting with a long string of zeros.
Because a set of input data can only generate one hash, to generate a hash that is “below” the target the network will alter the target by adding a ‘’nonce” which stands for a “number only used once”. This is the number that the miners are solving for. Miners Proof of Work results from the search, and miners who solve the problem first are rewarded. Once the correct hash has been found, it is then broadcast throughout the network, and the new block is added.
Proof of Work is a popular consensus mechanism because it makes altering a blockchain very complicated; it would require the re-mining of all subsequent blocks. PoW also makes monopolizing the network’s computing power difficult (a 51% attack) because of the costs for significant machinery and energy needed to complete the hash functions. Such a 51% attack would reduce the trust in the network, lowering the currency’s value and with it the incentive for such an attack.
PoW Hash Example
A mining computer will randomly engage in hashing functions until it arrives at an output with the correct minimum number of leading zeroes. Let’s look at the hash for block # 609819, which was mined Dec. 26, 2019:
The nonce was “1423672026” and the target was lowered using 18 zeros. This block consisted of 2971 transactions totaling 9,763 BTC. The winning miner received 12.5BTC as their reward for finding this hash. Any effort to change this block’s transaction amount would result in an unrecognized hash and would be rejected by the network as fraud.
Mining is competitive, and miners will pool resources to increase their chances of mining the correct hash. Mining equipment is usually in the form of specially made Graphical Processing Units (GPUs) or application-specific integrated circuits (ASIC). Each Bitcoin block takes approximately 10 minutes to mine, and the rewards are initially newly minted coins, and once all coins are minted, transaction fees. The mining process is both a lottery and a race with better hardware able to make more guesses at the hash, but any miner could be the first to guess correctly.
Proof of Work Issues
The main problem that comes with Proof of Work is the amount of energy needed to solve the hash, and the arms race that results. Network security is relative to the energy spent not to its hashrate. Solving a hash takes a certain amount of energy, and using specialized hardware is gaming the metric. Other miners will then need to follow suit and buy equal or more powerful hardware to have an equal or better chance. The faster the hardware, the harder the hash will have to be to solve, and therefore an ever-increasing total amount of power is required for essentially the same task of solving a single hash. Over time the amount of energy needed to complete this task has become great and is now an ecological concern.
For most miners between 60–80 percent of their revenue goes to electricity costs, so they want to save as much as possible on their electricity bills and are pushing for lowered consumption developments and to excellerate the transition to renewable sources. This push may be what the renewable energy sector needs to move forward.
The Cambridge Center for Alternative Finance (CCAF) estimates that bitcoin mining consumes 67.72 (potentially up to 163) Terawatt Hours per year, about 0.3% of global production, and equivalent to the electricity used by countries like Austria, Columbia, or Belgium. Though this is a significant amount of energy, it should first be noted that this is equal to the energy used by American Airlines alone and the less than the gold or banking sectors.
Data courtesy of Cambridge Center for Alternative Finance (CCAF)
Additionally, Proof of Work has an incentive problem, the network’s goal is to be more secure, but the miner’s incentive is to make money. Therefore, miners do everything to maximize their profits and prevent other players from competing, which does not help the network. Disincentives have resulted in some miners mining empty blocks and creating hardware with a single-use.
Proof of Work has proven its benefits as a consensus mechanism to secure the Bitcoin blockchain and several other altcoins. In the future, it may need to be altered or evolve to reduce its power consumption and change the miner’s incentives. For the time being, Proof of Work is a robust system that keeps blockchains safe, the transactions and funds of its users secure, and miners building their crypto fortunes.
Disclaimer: The author of this text, Jean Chalopin, is a global business leader with a background encompassing banking, biotech, and entertainment. Mr. Chalopin is Chairman of Deltec International Group, www.deltecbank.com.
The co-author of this text, Robin Trehan, has a Bachelor’s degree in Economics, a Master’s in International Business and Finance, and an MBA in Electronic Business. Mr. Trehan is a Senior VP at Deltec International Group, www.deltecbank.com.
The views, thoughts, and opinions expressed in this text are solely the views of the authors, and do not necessarily reflect those of Deltec International Group, its subsidiaries, and/or its employees.
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