Proof-of-Work

Decentralization is one of the most important characteristics of blockchain technology, which is the foundation of cryptocurrencies. This implies that any node in the blockchain network is equal, and there is no central authority determining which transactions are true and which are not. But how do the network's participants deal with this problem? They need to come to an understanding. This is achieved by the use of a consensus algorithm.

A consensus algorithm is a collection of mathematical rules that allow nodes in a network to agree while preventing fraudulent and invalid transactions. Proof of Work is the oldest and most well-known consensus algorithm used in cryptocurrencies.

Proof-of-Work

Proof of Work (PoW) is a consensus algorithm that requires blockchain network nodes to perform extremely complex computations (algorithm calculations) in order to validate transactions.

Other network nodes can quickly and easily check their outcome. The blockchain network rewards the first node that successfully completes all of the necessary computations. As a result, nodes battle for the honour of being the first to complete the task and collect the reward.

While the Proof of Work algorithm is now closely associated with cryptocurrencies, a related algorithm was first suggested in 1993 in a research paper devoted to spam prevention. In 1999, the word "Proof of Work" was coined. However, it wasn't until the introduction of Bitcoin and the start of the cryptocurrency era that this algorithm found widespread use.

PoW: How it works

In Proof of Work, miners are used in blockchains to validate transactions and generate new blocks. The network must create rules to pick a miner who will have the right to produce the next block in the chain to reward miners for their efforts.

The following is how the algorithm works:

• Users of the blockchain network conduct transactions by sending cryptocurrency to one another.

• Blocks are created by combining transactions.

• The authenticity of transactions within blocks is checked by miners.

• By calculating the correct hash for the block, the miners solve a complex mathematical puzzle. Those equations necessitate a significant amount of computing power.

• The first miner to solve the puzzle receives a prize.

• The blockchain stores the blocks of checked transactions.

The benefits and drawbacks of Proof of Work

Proof of work effectively defends the blockchain network from hacking attempts by making them extremely difficult and expensive. Furthermore, the more miners in the network, the less vulnerable it is to hacking attempts. Furthermore, this consensus algorithm is the oldest and most thoroughly checked in use.

However, Proof of Work has a number of significant flaws that have contributed to the creation of alternative consensus algorithms.

Electricity consumption is high, and computation is inefficient. Miners use a lot of energy, but the measurements they do aren't used for anything other than the network's needs.

The Proof of Work blockchain takes a lot of computational power to keep it going. Bitcoin mining, for example, cannot be achieved with low-cost video cards; it necessitates the use of efficient, costly specialised equipment known as ASICs, which are unsuitable for any other mission.

The cost of mining equipment becomes unaffordable for ordinary users as the network and calculations become more complicated. Blocks and transactions can only be mined and confirmed by vast groups of miners, wealthy individuals, and corporations with strong mining farms. If the owners of broad mining capacities begin to control the network's laws, centralisation increases.

The opportunity to be vulnerable to a 51 percent attack. If an attacker has control of more than 50% of the network hash rate, he or she can tamper with, cancel, or alter transactions to meet their needs. They can also use the blockchain for other malicious purposes. In this case, the hacker's hashing power is greater than that of the rest of the network, so the hacker's chain version would be accepted. Although attacks like these are difficult to carry out on common cryptocurrencies like Bitcoin because of their high hash rate, the danger is very real for lesser-known cryptocurrencies.

PoW Versus PoS

Due to the above concerns, the blockchain industry is attempting to develop Proof of Stake (PoS) consensus algorithms as alternatives to Proof of Work. It was first used in the Peercoin cryptocurrency, which was proposed in 2011.

Proof of Stake, unlike Proof of Work, does not necessitate any calculations. Users who choose to add a block and earn a reward are chosen at random from among those who have "staked" a certain amount of the respective cryptocurrency for this reason. The likelihood of being chosen is determined by the stake's size as well as other factors such as the stake's age.

The Proof of Stake algorithm solves the big problems associated with Proof of Work thanks to its features. Since it does not need any computation, the Proof of Stake blockchain does not need costly mining equipment or massive quantities of energy to operate, which avoids centralization. To carry out a 51 percent attack, a hacker will need to have more than 50% of a cryptocurrency, rendering it futile because they would suffer the most losses.

However, Proof of Stake has its own set of disadvantages. The relationship between the probability of receiving a reward and the size of the stake encourages users to save coins rather than use them to make purchases. A select group of big coin holders might also be able to impose their own rules on the entire network. Furthermore, cryptocurrency developers using this algorithm must solve the initial coin distribution problem, since coins must first be collected from somewhere in order to be staked.