Proof Of Work — Everything You Need To Know

One of the biggest innovations within the fintech industry over the past two decades is blockchain technology. Being able to transact over the internet without any intermediary holding or approving your transactions is an astounding feat.

It introduces possibilities never seen before like maintaining absolute control over your funds, cheap transactions, and several non-financial innovations like storing data with the utmost integrity.

While all the use cases brought about by blockchain technology sound great, what’s to say that nobody hacks a blockchain network the size of Bitcoin, rendering all the value on it useless? Considering that such an event has never happened with Bitcoin — how do it and similar blockchains remain secure? Who secures such networks and why do they do it?

As we delve into various aspects of blockchain security, let us understand the mechanism that kicked off the blockchain revolution by keeping transactions and funds secure without the need for centralized entities.

It all began with Proof of Work (PoW) — a mechanism fundamental to the functioning of blockchains. While other such mechanisms exist and get adopted more widely these days, they are a result of innovations based on the original blockchain consensus mechanism, PoW.

What is Proof of Work (PoW)?

Proof of Work is a consensus mechanism that blockchain networks like Bitcoin and several others use to confirm transactions and keep themselves from getting inconvenienced by invalid transactions. In PoW blockchains, network participants known as miners actively compete to create transaction-filled blocks and add them to the chain of ever-increasing blocks (why the blockchain is called the blockchain).

How this works is that all the miners present on a PoW blockchain network are required to solve cryptographic puzzles. This usually needs sophisticated mining rigs and large amounts of processing power — both of which are considerably expensive.

The miner who solves the cryptographic puzzle the earliest gets to create a block filled with transactions and add it to the blockchain. Once the block gets added, the process repeats.

The block added by the miner, ideally, contains a list of pre-validated transactions. Of course, nothing stops the miner from adding invalid transactions to it. Usually, such attempts get made while bad actors try to double-spend cryptocurrency.

Double-Spending

Double-spending is when cryptocurrency already transacted from one wallet to another gets transacted again. Such an occurrence invalidates the previous transaction and can scam the recipient of the first transaction if goods or services got delivered based on that transaction.

Moreover, double-spending attacks can destroy the reputation of a blockchain and send the value of its assets crashing. They can only be accomplished in certain conditions and are near impossible to execute on larger blockchains like Bitcoin.

How PoW Secures Blockchains

Consensus mechanisms like PoW exist to prevent double-spending attacks from getting executed. That is the reason why the blockchain gets acknowledged as one of the most significant developments in technology. Its implementation of the PoW system made it possible for individuals to transact value digitally without any intermediary controlling the operation.

Otherwise, banks and financial institutions oversee keeping tabs on transactions and balances. However, this model of finance requires you to hand over the control of your money to entities like them. Events in the recent and distant past show why that may not be a good idea.

Eventually, issues with traditional finance are what led to the development and adoption of blockchain technology. This technology relies on distributed networks formed by random participants worldwide to maintain a bank-like ledger. Except nobody controls the entries on blockchain ledgers, it is transparent for all to see, and the data on it remains immutable.

Its use of PoW allows network participants called nodes (specifically, full nodes) to verify each block that gets added to the chain to prevent double-spending. Full nodes are network participants that keep a record of every single transaction confirmed on the blockchain network. Technically, miners are also nodes. They may or may not be full nodes.

When a block gets added by a miner, the nodes examine it and its transactions. A majority consensus reached by at least 51% of the nodes on the network is needed for a block to be considered valid.

If a block with a fraudulent transaction gets noticed, consensus on its validity does not occur, it gets flagged, and miners stop adding new blocks past it. If they get added beyond the invalid one, it is by the efforts of the bad actor(s) looking to double-spend.

Instead, the new blocks get added to the block preceding the invalid one. Since most of the miners act in good faith, the chain created by the invalid block gets outgrown by the chain containing valid blocks.

That is why PoW blockchains rely on using lots of processing power for their functioning. PoW blockchains with a robust base of network participants will always be able to overpower rogue miners looking to overspend.

In theory, double-spend attacks are possible when bad actors can accumulate a hash rate (processing power) totaling up to 51% or more of the blockchain’s entire resources. Looking at this realistically, gathering that amount of resources to bring down a blockchain the size of Bitcoin is exceptionally expensive and can run into billions of dollars.

Logically, it makes no sense to spend that amount of money to bring down a network. If the miners had those kinds of resources, they would be better off mining valid blocks. The profits that get generated would overshadow that of any double-spend incident in the long run.

That implies that miners get rewarded for their efforts in running pricy mining gear and expending processing power. The incentives are why miners are committed to securing the blockchain networks they participate in from double-spend attacks (also called 51% attacks for apparent reasons) and other occurrences.

Moreover, the need for expending copious amounts of energy and using expensive mining systems is a barrier to entry. Creating invalid blocks will lead to rogue miners not getting rewarded while wasting expensive resources that will set them back financially.

Essentially, PoW uses game theory to get miners to secure blockchain networks and also to prevent bad actors from attempting double-spend attacks. PoW’s use of enormous quantities of energy to achieve this, however, poses sustainability issues.

The Downside Of PoW Blockchains

Let us look at Bitcoin — the largest and most popular PoW network. The network’s scale and usage make it obvious that it consumes the most energy compared to any blockchain. By itself, Bitcoin uses more electrical energy than certain nations. Combine that with all other PoW blockchains that function today — you can see why PoW implementation gets concerning.

Rightfully, environmentalists and sustainability advocates are raising alarms about the impact that PoW blockchains have on the environment. While Bitcoin will remain environmentally unsustainable for the foreseeable, Ethereum has moved to the Proof of Stake (PoS) consensus from PoW in an update known as The Merge, ensuring a reduction of 99.95% in its energy consumption.

Newer blockchains, too, are adopting the PoS consensus for that reason. Other consensus mechanisms that cause negligible environmental damage are also emerging. So, blockchain technology is becoming sustainable with advancements in the industry while legacy networks like Bitcoin continue to be responsible for massive carbon emissions.

PoW Implementation Will Live On

While many consider PoW a legacy system waiting to be replaced by more sustainable ones, many blockchain enthusiasts agree that it offers the highest levels of decentralization. Decentralization, one of blockchain technology’s core tenets, keeps people interested in its applications — mainly cryptocurrency.

For that reason, Bitcoin remains the most popular cryptocurrency and network. Newer consensus mechanisms may receive mass adoption, but PoW will live on through Bitcoin’s supremacy.