Proof of Work (PoW) is a set of algorithms that involve a mining process to validate transactions to be added on the blockchain. Proof of work is a process that requires electrical energy and time as input and after a transaction-specific condition in coding is met, which is set according to the difficulty of the process and the block is validated.
Need for Distributed Consensus
Proof of Work (PoW) was designed to deter centralised corruption and avoid DoS or Denial of Service attacks. A centralised server of a bank or a financial institution is vulnerable to attacks and fraud inside the system which can authorise fraudulent transactions. However, with ‘reusable Proof of Work (PoW)‘ protocol, a distributed consensus is required to confirm the transactions, decentralised security is, hence, achieved.
Proof of Work is a term coined by Markus Jakobsson and Ari Juels in a document published in 1999. PoW idea was initially posted by Cynthia Dwork and Moni Naor back in 1993. The concept was adapted to money by Hal Finney in 2004 through the idea of “reusable proof of work.” Hal Finney, coincidentally, is also the first receiver of a Bitcoin sent to him by an anonymous alias Satoshi Nakamoto in 2009.
How is Proof of Work (PoW) established?
The miners are the building blocks of the PoW network. A globally distributed network of miners, verify transactions on a unified public ledger, this ledger is ubiquitous across the network and is a duplicate copy of each other. The ledger is updated with each transaction to form a block, and the blocks are linked together to form the blockchain.
The Proof of Work is given by the miners when they find the solution to a complex mathematical condition that is calibrated according to the sender and receiver’s address and the mining capacity of the network. The correct solution of the problem also verifies the authenticity of the transaction and avoids double spending.
Hash Power is a measure of the capacity of the miner to solve the complex encryption problem. The difficulty of the problem increases when the Hashing power of the network increases. The rewards decreases as more and more miners join the network. Correspondingly, when the miners leave the network, the stakes for existing miners increases.
The rewards can also be affected by technological advancements where advanced mining systems are engineered with extensive hashing power, as in the case of ASIC miners. Nevertheless, there is a limitation to the total amount that can be mined entirely in a stipulated time period; this promotes fair and transparent mining process with a long-term business opportunity.
Drawbacks in the Algorithms
It is, however, an energy-intensive process, and economics for the miners can often be unfairly distributed. In the current fluctuating markets, there is no definitive ROI for miners that can be calculated as the market is so dynamic that -20% – +20% fluctuations are considered normal. The miners due to their extensive energy consumption also produce a considerable amount of heat which requires a cold climate or an efficient cooling system. These challenges have been addressed by Proof Of Stake (PoS) networks. Despite the introduction of Proof of Stake (PoS), Bitcoin (BTC), Monero (XMR), Ethereum (ETH), Dash, Zcash (ZEC), ETC are running quite successfully with the coin incentive protocol in exchange for their processing electrical powers and time.