What is “Proof-of-Work”?

December 23, 2021

Green Guy

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Definition

Proof of Work

Proof-of-Work uses computers known as ‘miners’ to pass blocks. A block contains the transaction data made on the blockchain. To pass a block, miners have to solve a complicated cryptographic problem.

The miner that solves this problem first shares their solution to the other miners in the network—that way, it gets checked.

If the solution is wrong, then it gets rejected. And if the solution is correct, then a new block gets added to the blockchain.

This confirms the transaction activity for that block. For working towards solving the problem, the miner gets rewarded with cryptocurrency and any accrued transaction fees.

The problem with Mining

The cost of running miners gets costly. That’s why miners want to provide correct solutions. When a blockchain grows, like, Bitcoin, more and more miners will compete for rewards. This forces miners to upgrade their hardware. If a miner provides a false solution to the cryptographic problem, they will not earn rewards, and they lose money from the running costs!

Advantages and Disadvantages of Proof-of-Work

Advantages

Security: Proof of Work blockchains are secured by the miners and nodes validating the activity in the network. A node is not a miner; they just confirm the activity on the blockchain. So, the strength of the blockchain increases with every miner and node added to the network.
Running a node: For some Proof of Work blockchains, like Bitcoin, anyone can run a node with basic hardware.
Removal of third parties: Proof of Work blockchains need each node and miner to have their own copy of the blockchain. This lets them independently verify the blockchain’s activity. Because of this, Proof of Work blockchains have eliminated the need for third parties, like banks, from payments.

Disadvantages

51% attacks: A 51% attack is when a Proof of Work blockchain has a bad actor that controls a minimum of 51% of the blockchain’s miners. This lets them manipulate transactions and confirm their own solutions to pass blocks.
Limited transaction per second: A consequence of each node having their own copy of the blockchain is that if the entry requirements for running a node are minimal, then the transactions per second are limited.
Blocksize: Proof of Work blockchains can increase their transactions per second by increasing the block size. But this makes the requirements for running a node more challenging as it’ll require specialist hardware. This reduces the security of the blockchain as fewer people can verify the transactions.
Centralization: More miners on the blockchain upgrading their equipment reduces the chances of earning the block rewards. That’s why miners sometimes join up together and share the mining rewards between the group. But this centralizes the blockchain.
Energy-intensive: With every node and miner confirming the transactions — even if the solution given by the miner is right — consumes lots of energy.

Comparing Proof of Work with Proof of Stake

Proof of Work is one type of consensus mechanism. The alternative is Proof of Stake, which we covered in a separate article.

Below we created a table that compares the two:

Proof of Work	Proof of Stake
Miners solve cryptographic problems to pass blocks.	Validators are randomly selected to verify transactions.
The size of blocks impacts the transactions per second.	Validators run on computer hardware. But they also need a minimum amount of cryptocurrency stakes.
Mining equipment is costly to run and maintain.	The cryptocurrency requirement to run a validator can be inaccessible. Those priced out can use third-party staking providers.
The ability to run a node depends on the block size. The greater the block size, the less accessible it is.	Validators are rewarded based on their stake.
Susceptible to 51% attacks.	Randomly selected validators can prevent collusion. This is not guaranteed.
Energy-intensive and inefficient.	Energy consumption is dramatically lower. For example, Ethereum moving from Proof-of-Work to Proof-of-Stake will use 99.95% less energy.