Unlocking The Crypto Puzzle: Part 7 — Proof of Work / Proof of Stake / Proof of Trust
In the beginning, there was Proof of Work… and it was cool. Proof of Work eventually begat Proof of Stake, promising to make life easier for some. And finally, Proof of Work and Proof of Stake begat Proof of Trust, which again changed the rules (and the speed) of the game.
Proof of… is a concept used in cryptocurrencies that is at the center of how blockchains work. Over the next three Episodes, I’m going to explain how each works and why they are important.
PART 1: PROOF OF WORK
If you’ve spent any time inside the realm of cryptocurrency, you’ve probably heard the term Proof of Work (PoW). And you may even know that it’s got something to do with mining cryptocurrency. But unless you are truly immersed in the minutia of how crypto mining functions, you probably don’t realize what an important part it plays in making the whole crypto puzzle work.
The concept of PoW was originated in 1993 by Cynthia Dwork and Moni Naor as a way to battle junk mail. Then in 1999, Markus Jakobsson and Ari Juels used the concept in a paper on crypto security and dubbed it “Proofs of Work”.
But many would argue that the concept of PoW didn’t become mainstream until 2009 when Satoshi Nakamoto used the concept as a cornerstone of his innovative Blockchain protocol for Bitcoin.
In Bitcoin’s blockchain, PoW is the original consensus algorithm that is used to confirm transactions and produce new blocks in the chain. Now that sounds like a mouthful, but an easier way to look at it is this: A PoW is a mathematical puzzle that computers (miners) compete with each other to solve. When they complete the puzzle, they announce it to all the other miners on the chain and they verify the results. Once verified, it creates another link in the blockchain and the group of transactions contained in that particular block are considered completed. The miners spend time and money doing this because they are rewarded with financial incentive — they receive Bitcoin for their efforts.
What this process does is remove the need for a third party — banks, credit card companies, PayPal — to verify and guarantee the legitimacy of your financial transaction. In traditional financial transactions, these organizations would keep private ledgers that stored all transaction history. With PoW and blockchain, everyone participating (mining) has a copy of the ledger, so no one has to trust, or depend upon, third parties because anyone can directly verify the info inside the blockchain.
For example, John wants to send Carol $100. John’s bank debits $100 out of his account and puts $100 into Carol’s account. Both John and Carol have to trust the bank will do what is says. And you pay the bank a fee for this service. With blockchain, there is no need for the bank to serve as the “middle-man” in this transaction. And that’s why blockchain is called a “trustless ledger system.”
In the Bitcoin blockchain, John wants to send Carol $100. Through his Bitcoin wallet, he sends the funds to Carol’s Bitcoin wallet via a pre-determined string of letters and numbers called an address, which is forever linked to Carol’s wallet. The process of sending these funds are called a transaction.
A group of transactions are bundled together and create what we call a block. Then the miners verify that the block is legitimate by solving mathematical challenges. These challenges are known as the “proof-of-work problem”.
Once a miner successfully figures out the mathematical challenge, he tells all the other miners the answer, and they verify his work. Once an agreed upon number of miners approve the work, the block of transactions is considered complete. They become the next block in the blockchain and the process starts all over again for a new group of transactions.
While it seems simple enough, there are complex mathematical challenges that take place throughout the process to assure the legitimacy of the claim. The original puzzle must be extremely complicated to solve. In fact, they are designed so that the only way to solve the puzzle is through a large number of attempts, known as a “brute force” work. Once a solution is discovered and announced, it must be simple for the other miners to verify.
However, this system also has difficulties. In order to keep the system functioning smoothly, the difficulty of the puzzles increases depending upon the number of miners competing. So as mining became popular, with major companies being created with huge Petahash of computing power, the cost of solving the puzzle becomes higher.
And Bitcoin isn’t the only crypto to use Proof of Work as its verification system. Ethereum, the number two cryptocurrency in the world today by market capitalization, also uses PoW. However, in 2015 Ethereum announced they were going to move from a Proof of Work protocol to a Proof of Stake (PoS) protocol. That has proved to be a challenging decision, but it now looks like Ethereum’s move to Proof of Stake is scheduled to happen later this calendar year (2019).
PoW was the first consensus blockchain used in cryptocurrency. It was first introduced by Bitcoin but other quickly followed suit. And while was a unique solution for the problem of removing the “middle man”, it brought with it many disadvantages as well. In the next Episode, we’ll explore what those problems were and how that led to the creation of Proof of Stake and why Ethereum and other coins are shifting to this newer transactional solution.
