Simply Explained: Why is Proof of Work Required in Bitcoin?
Target Audience:
This blog post is aimed at a developer audience unfamiliar with blockchain.
TD; LR:
The essence of the proof of work consensus mechanism is to provide evidence that the majority of nodes agree and do not lie.
What is Bitcoin?
Bitcoin is a decentralized and permission-less digital money protocol that allows for the peer to peer transfer of value without a central intermediary.
Why is Proof of Work in Bitcoin necessary?
A proof of work verification is difficult, costly, and time-consuming to create, but easy to verify. Bitcoin is secure because it is computationally infeasible to attack the network. Requiring Proof of Work for participation is central to this property. Hence Bitcoin relies on computational work on cryptographic challenges as the basis for trust.
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Proof of work (PoW) is necessary for security, which prevents fraud, which enables trust. This security ensures that independent data processors (miners) can’t lie about a transaction. Proof of work is used to securely sequence Bitcoin’s transaction history while increasing the difficulty of altering data over time. It is used to choose the most valid copy of the blockchain in the network if there are multiple copies. Finally, proof of work is the key to creating a distributed clock, which allows miners to freely enter and leave the network while maintaining a constant rate of operation.
To truly understand the proof of work, however, we must understand the basics of blockchains.
Blockchain Basics:
Bitcoin’s transaction history is stored in a data structure called a blockchain. The blockchain — logically — is made up of a chain of blocks. Blocks are produced roughly every ten minutes and are made up of transactions. Transactions are transfers of Bitcoin from one account to another broadcasted on the network. Transactions within the blocks are ordered by the miners (block creators) according to the optional fee a user includes as an incentive. The higher the fee, the more likely the transaction is included. Anyone can run a mining node. Every miner has a copy of the same blockchain. The act of creating a block is called mining.
Blocks are organized chronologically by linking each block with the hash of the previous block.
Immutable blockchain:
Linking a block with the “proof of work” hash of its predecessor results in tamper resistance. Since every block’s hash is an ingredient in the next block’s hash, any alterations in the chain will alter the final “proof of work” hash and all block hashes in between. The deeper the altered block, the more computational effort needed for tampering. The last hash of the chain represents the cumulative work of the entire chain, similar to a checksum.
Proof of Work explained:
Bitcoin uses the hashcash system to generate blocks. Miners create blocks by calculating the solution to a proof of work challenge. They need to find a specific hash below a target 256-bit number. Hashcash uses a SHA256 to produce a hash that changes wildly with any change of data. It is impossible to derive input from the output. The only way to solve this challenge is via costly guessing, i.e., proof of work.
To guess the “proof of work” answer, miners take in the list of transactions and add a guess number (nonce) as inputs for the hashing function. Since miners freely enter and leave the network, the difficulty is adjusted every 2,016 blocks to keep each miner’s probability of solving the block within the ten-minute interval. This decentralizes the verification process across the entire network. This adjustment occurs by the protocol automatically increasing or decreasing the target based on the number of miners.
Consensus:
The first miner to find the "proof of work" answer broadcasts their solution to the network. All nodes are notified that a new block was discovered. They double-check the solution and then begin working on the next block. This work is highly redundant; all miners compete on the same set of transactions to find a solution.
If correct, the block miner earns the transaction fees and a block reward. A block reward (currently at 12.5 bitcoin) is a new bitcoin that is created and accredited to their account. This competition forms the agreement (consensus mechanism) which syncs all nodes with the same blockchain copy.
Security:
The protocol only considers the longest chain (one with the most “proof of work”) as valid and authentic. A fraudulent chain is impractical over the long term because a miner has a low probability of consistently winning the block reward to maintain the chain. Over time, other miners will extend the valid chain faster than the tampered chain.
Issues with Proof of Work:
Bitcoin’s Proof of Work consensus mechanism has several problems:
1. It is environmentally taxing.
2. It is vulnerable to the 51% attack. If miner(s) take over 51% of the hashing (guessing) power, they can dictate what truth is.
3. There is no mechanism to penalize any malicious miners beyond the high cost of attempts.
4. It does not scale well since every node must process every transaction. Sharding the network might increase efficiency but lower the security.
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