Why Proof of Work (PoW) Matters

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Coinmonks

10 min readMar 24, 2022

Crypto currency networks use either Proof of Work (PoW) or Proof of Stake (PoS) to build their respective blockchains, a.k.a. the ledger of all the blocks containing all the transactions that happened on the network.

The Bitcoin network uses PoW, which requires solving a mathematical puzzle, before everyone else, in order to win the ability to add a new block of transactions to the blockchain.

Adding a new block to the network’s blockchain brings with it a block reward & network transaction fees.

The current block reward for successfully mining a Bitcoin block, a.k.a. solving the mathematical puzzle, is 6.25 Bitcoin. That’s issued by the network itself to the miner who mined the last block.

When the network started out, in 2009, the block reward for solving the mathematical puzzle and adding a new block to the Bitcoin blockchain, was 50 Bitcoin.

This block reward, however, gets cut in half, every 210,000 blocks mined.

This event is called The Halvening or Halving―both are accepted versions, but I prefer halvening so, I’ll stick to that―and, since it takes, roughly, 10 minutes to find a solution to the mathematical puzzle and mine a new block, this event happens about every 4 years.

Basically, after the first halvening, the block reward dropped, from 50 Bitcoin, to 25 Bitcoin.

At the second halvening, the block reward dropped again, from 25 Bitcoin, to 12.5 Bitcoin.

The latest halvening, which happened in May of 2020, brought us down to the current block reward of 6.25 Bitcoin.

This “trend” will continue, because it’s imbedded in the Bitcoin protocol, until all 21 million Bitcoin are mined, which is expected to happen sometime during 2140.

The network transaction fees are simply fees paid by those who wish to make transactions on the Bitcoin network.

The work required to find a solution & successfully mine a Bitcoin block is done with specialised computers called ASICs (Application-Specific Integrated Circuit).

These are specialised hardware build specifically for mining Bitcoin.

You can’t use them to play Fortnite, but you can use them to heat up your home or your hot tub so, that’s cool.

Now, you can imagine that, to mine Bitcoin, you require specialised hardware, which uses electricity, and requires physical space to be kept in & be maintained, because, you know, stuff breaks.

All those are resources that can’t be printed out of thin air.

Crypto currency networks that use PoS for “mining” and validating transactions, on the other hand, don’t have any of those limitations.

For that reason, they’re promoted as gReEn, but they are far from capable of doing what they’re intended to actually do, in a trustless and permissionless way.

To extend the blockchain and validate transactions, using PoS, all you need is to own and stake the tokens of the network.

One such network is Cardano.

I won’t go into depth on how that network works, because it’s not the purpose of this writing.

The basic idea to understand is that, in PoS, the more stake you have, the more blocks you will get to “mine” ➡️ the more transactions you get to validate ➡️ the more rewards you get in the form of the token of the network.

Think about it this way…

Let’s say YouCoin is a crypto currency network that uses PoS, the supply of YouCoins is currently 100, and every block “mined” rewards the “miner” 1 YouCoin.

We’ll exclude transaction fees, for this example, to keep it as simple as possible.

Say you have 10 YouCoins staked, but Rob has 20 YouCoins staked, and Emma has 40 YouCoins staked.

The other 30 YouCoins in existence are in circulation & used for transacting so, not staked, in order to “mine” blocks and validate transactions.

The total amount of YouCoins staked is 70, and you own 10, which represents 14.28% of all the coins staked for the purpose of “mining” blocks and validating transactions.

Meanwhile, Rob’s 20 YouCoins represent 28.57% and Emma’s 40 YouCoins represent 57.14%.

Because, in PoS, there is no competition to find a solution to a problem, like in PoW, the way the network assigns who gets to “mine” a new block and validate transactions is based on the percentage ownership of the total amount of staked coins.

So, based on the amount of YouCoins that you have staked, you will get chosen, by the network, 14.28% of the time to “mine” a new block and validate the transactions in that block.

Rob and Emma, on the other hand, will get to “mine” a new block and validate the transactions in the block, 28.57% of the time and 57.14%, respectively.

Since Emma owns the majority of the total YouCoins staked on the network, she’ll be chosen, by the network, more often than you or Rob to “mine” a new block and validate the transactions in that new block.

That means Emma will collect, overall, more new YouCoins issued by the network as a reward for “mining” a block.

What does that also mean? It means that Emma’s percentage ownership of the total amount of staked YouCoins, for the purpose of “mining” and validating transactions on the network, will grow faster and faster.

Why? Because she gets rewards more often than you or Rob, which, in turn, grows her chances of being picked, again, by the network, to “mine” blocks and validate transactions.

It’s a self-reinforcing mechanism.

You probably heard of compounding interest.

It works exactly the same.

What’s the problem with PoS then?

Well, the only way to get YouCoins for you to stake is by being rewarded in them from “mining” and validating transactions, or by buying them from Emma and Rob.

But why would Emma and Rob want to sell their precious YouCoins to you and lose their immense privilege of getting richer and richer by doing absolutely fuck all?

Remember…

There are no extra resources required for “mining” and validating transactions, in PoS, like there are in PoW, where miners need resources like hardware, engineers, electricity, space to mount the hardware, etc. to mine blocks.

In Bitcoin’s PoW, you don’t need anyone’s permission to start mining.

You can even do it with pen and paper, and nobody in the world needs to know you’re working on solving the mathematical puzzle.

You won’t do well against specialised hardware, but you can buy/build your own specialised hardware to do it for you.

The idea is that nobody is able to dictate who can start mining Bitcoin and who cannot.

Why? Because all you’re doing, when mining blocks on the Bitcoin network, is solving a maths problem.

It would be pretty silly to be told you’re not allowed to do maths, right?

In the case of PoS, where the ones holding the majority of coins staked are in control of the network, if you want to reduce their control of the network, you have to buy their coins, but they have to want to sell them to you or anyone else.

But why would they do that?

It costs them absolutely nothing to keep their stack and let it grow naturally by getting more and more rewards for “mining” and validating transactions.

They have absolutely nothing to gain and everything to lose, by selling you their coins.

Basically, in PoS, the rich get richer, the poor get poorer.

The more coins you have staked, the more coins you’ll get rewarded.

The fewer coins you have staked, the fewer coins you’ll get rewarded.

If it sounds like a familiar concept to you, it’s because it is.

Our current monetary and financial system is a PoS network, in which, the rich get richer, while the poor get poorer.

That’s why PoW matters.

It’s the only way we can have a monetary network that’s honest and fair, in which nobody can control the rules or get most of the rewards by doing no work or taking no risk.

You might say “but governments, for example, could just buy a lot of Bitcoin miners and start to control the network by owing the majority of the Bitcoin mining infrastructure”.

While that, in theory, sounds possible, there are 2 big and very important aspects you need to take into consideration.

1. While a government like the US, for example, could just print money out of thin air, for the purpose of buying Bitcoin mining hardware and building the infrastructure to operate them, you have to understand that mining hardware or the infrastructure to run them cannot be printed out of thin air.

It would take years to do it and the cost would continue to go up, as more and more miners join the network, looking to get the rewards offered for successfully solving the mathematical puzzle.

I saw this posted, the other day, and it makes a good addition to this first point.

To attempt to own 51% of the Bitcoin mining network, it would currently cost just over $36B.

2. Unlike in PoS, owning 51% of the mining capacity, doesn’t give you power over the network, because you have to abide by the network’s protocol consensus rules.

The nodes are what dictate what the rules of Bitcoin are.

The miners are simply delivering a service to the nodes.

The nodes are the ones checking that miners have, indeed, found a solution to the mathematical puzzle, and that all the transactions in the block match the current state of the ledger, a.k.a. who owns how much Bitcoin.

If miners try to game the system by submitting solutions or transactions that don’t fit the criteria of the network protocol rules, their solutions or transactions get rejected instantly and all the resources they spent to produce that solution goes to waste.

It’s estimated that there are over 10,000 Bitcoin nodes run around the world.

That’s over 10,000 computers running the Bitcoin network protocol rules and enforcing them on the miners.

Nodes also check each other by making sure that the ledger is the same for all and they’re all on the same page.

It’s basically like everyone checking everyone else’s homework.

Gaming the Bitcoin network is like trying to convince tens of thousands of computers of something like 2+2=5.

Good luck with that!

Anyone in the world can run their own Bitcoin node on nothing more than an old laptop or buy dedicated hardware, which would cost ~$250.

The ease and affordability to run a Bitcoin node and validate the entire blockchain and all the transactions within it is what allows the Bitcoin network to be truly decentralised.

Compare that with other crypto currency networks (i.e. Ethereum) that require hardware found only in data centres, to run a node, in order validate the blockchain and all the transactions within it.

How many people can afford to spend thousands or tens of thousands, in some cases, of dollars, just to run a node?

Probably not many, right?

That aspect is what limits how decentralised a network can be.

If only a small number of people can run nodes and validate the network’s blockchain and all the transactions within it, because of the insane cost, which only goes up higher and higher, that means that the network will get increasingly more centralised.

That also means that the people who are able and can afford to run the nodes for validating the blockchain are also the same ones who can decide what the network’s protocol rules are.

The people who run the few nodes in for the Ethereum and other DINO (decentralised in name only) networks are the ones who decide what the network protocol rules are.

They’re the same people who can change these rules and everyone else has to abide by them.

In Bitcoin, on the other hand, because of how decentralised the network already is, and will continue to get even more decentralised, because of the low cost, there isn’t a small group of people who can dictate what the network protocol rules are.

Everyone already running a Bitcoin node is enforcing the same protocol rules as the other thousands of nodes.

Essentially, they all speak exactly the same language or play the same game, you could say.

If one node decides to change the rules it enforces, for example, changing the supply cap from 21 million Bitcoin to 48 million Bitcoin, they can do that, because Bitcoin is open-source code, but they will no longer run a Bitcoin node.

No other Bitcoin node is obliged to accept, let alone enforce, those “new protocol rules”, which say that the supply cap is 48 million Bitcoin, not 21 million.

Think about it this way.

Everyone in the world knows the rules of chess.

The game has been around for 1,500 years and its rules have remained the same.

Everyone is playing the game with everyone else following the same rules as everyone else.

What they do differently is build and deploy strategies for playing the game that are designed around the rules of the game.

Attempting to change the Bitcoin network protocol rules, at this point in time, is akin to changing the rules of chess and then trying to convince everyone playing the game to, now, play your version of chess.

Good luck with that too!

So, to wrap things up, in order to have a trustless, permissionless monetary network, it has to be decentralised and use PoW, because:

You can’t fake work.

You either do it or you don’t.

You either solve the new maths problem or you don’t.

That’s what keeps the Bitcoin network honest.

The only way you can find a solution to the maths puzzle is by brute force, which requires expending time, energy and resources, a.k.a. doing the work.

The math puzzle is such that it should take, on average, 10 minutes to find a solution.

You can’t cheat that.

You can’t fake spending the time, energy and resources.

For that reason, all cRaPtO networks that function on PoS, not PoW, can and will be taken over by the people who can access money easily (i.e. printing it out of thin air) and buy up large amounts of the cRyPtO’s tokens, and begin to control it.

Hope you got a better understanding of the importance of PoW and why it matters.

Thanks for reading! 🧡

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Written by Marius Ciubotariu