Alt500 #6 — MINING AND PROOF OF WORK
Right here we aim to give you a basic and easy to understand explanation of the crypto industry concepts ‘mining’ and ‘proof of work’.
Today we’re going to be having a look at Proof of Work- a system originally developed in 1993 and adapted to usage in the crypto industry in 2009, with the launch of Bitcoin. As it was the originator, this article is going to focus mainly on Proof of Work as it is used in the Bitcoin network, but its core concepts are ubiquitous across the multitudes of cryptocurrencies based on the Bitcoin platform.
In Blockchain technology, users ‘mine’ cryptocurrency by solving extremely complex mathematical challenges. These challenges are designed to group transactions on the Bitcoin network together into ‘blocks’, verify the transactions as legitimate, and then add them to the end of the Blockchain. When the challenges are solved, the user is rewarded with part of a Bitcoin.
Solving these takes a tremendous amount of computing power, which limits the amount that can be solved and thus the amount of Bitcoins released. The challenges’ difficulty can also be altered to become either more or less difficult. Bitcoin adjusts difficulty approximately every 2 weeks, with the goal of keeping the rate of block discovery and coin releases at a constant. (However, the block reward- the amount of bitcoin released with every new block mined- is halved approximately every 4 years in order to ensure the supply is finite and safeguarded against inflation).
PROOF OF WORK
The data obtained when a user has solved one of these challenges is known as a ‘Proof of Work’. This piece of data is associated with the block of transactions, and is difficult to produce yet easy to verify. It proves the legitimacy of a block and prevents illegitimate transactions from taking place. The public nature of the Blockchain- a shared ledger of every transaction taking place- is protected from tampering with Proof of Work. It stops fake blocks from being added to the Blockchain and stops an individual having control over which block is added to the Blockchain next. It’s difficulty to obtain also gives bitcoin some of its value.
Proof of Work is a multi-purpose concept, and is successful in maintaining a cryptocurrency and validating its transactions. However, many now see it as a limiting factor to the growth of alt coins, because of two main disadvantages.
One is simple. Mining is an extremely energy and time consuming process, considering it is essentially valueless for most of the Miners almost all of the time. If another way to verify transactions and protect against malicious attacks could be found, the amount of computing power involved in generating Proof of Work could be used in much more efficient ways.
The second is concerned with the monopolisation of mining, which would be the opposite of the decentralised and incorruptible currency Bitcoin is supposed to be. In the future, as the rewards for mining decrease, so too will the amount of miners. This would leave the network more susceptible to a 51% attack, in which a miner or group of miners control more than 50% of the computing power on the network. If this was the case, they’d then be able to completely control which transactions are added to the Blockchain, as well as spending their own coins multiple times.
In an upcoming article, we will delineate some alternatives to Proof of Work- focusing on the main one being proposed, known as Proof of State.