Why Proof of Work Matters

proof of work

Proof of Work - Why It Matters

A blockchain is a simple way of storing information based on complex decentralized consensus algorithms. The main and most popular consensus algorithms include Proof of Work, Proof of Stake and Proof of Authority. The main blockchains currently either use one of these consensus algorithms or a combination of these. Ethereum for instance, is currently using proof of work but is planning to migrate to proof of stake soon, with their Casper upgrade.

How does it work?

Proof of work is currently very popular and has been the basis of the success of the most valuable and popular blockchains including Bitcoin and Ethereum. This consensus algorithm works by requiring users or network participants to use hashing algorithms to find the correct solution to a mathematical problem by allowing the participants to validate blocks by investing their computing power in return for Bitcoin. This creates a very elegant and efficient monetary and reward-based model for encouraging or incentivizing people to participate in the network.

Open and permissionless blockchains like Bitcoin and Ethereum allow anyone to participate in the network freely. Although this is a very inclusive system, it also creates opportunities for different players to send malicious transactions with the aim of cheating the system and this can be done fairly easily with an open network by using coordinated and uncoordinated attacks. This is usually known as the Byzantine Generals' Problem and is a very complex problem to solve. The proof of work consensus algorithm helps make blockchains byzantine fault-tolerant and encourages participants to engage in the right behaviour by disincentivizing incorrect behaviour. In retrospect, proof of work can be said to a punishing consensus algorithm in the sense that any bad behaviour by the way of introducing soft forks in the network are penalized by the loss of the computing power investment made while mining for new coins.

Security and Integrity

Proof of work offers a very secure system to run a blockchain. Bitcoin, for instance, is subject to various types of attacks on a daily basis from the simplest to the most sophisticated. However, even as the value of Bitcoin soared, any attack did not have a lasting effect of the network, but instead made the network more resilient and trustworthy.

This is the direct result of the way proof of work functions. Cheating the system and updating previous records in proof of work blockchains is extremely costly and would only result in waste of resources and money. The reason behind this intentional security feature is that as more blocks are added to the blockchain, changing a block will mean to redo the proof of work for that specific block but also all the ensuing blocks.

As mentioned earlier, this aspect of proof of work also discourages soft forks and ensure that the main network remains active. However, this does not stop anyone from setting up a different direction for the blockchain and encouraging people to follow the new fork. This represents the whole idea behind open and permissionless blockchains, in that anyone has the freedom and choice to follow the main network or set up different forks of the network.

Myths and Truths of Proof of Work

Proof of work is a particularly resource-intensive operation and requires a large amount of energy to make the system feasible, strong and secure. As a result, there has been and still are a lot of debate about the energy requirements of proof of work and whether there is considerable wastage of resources in the mining process. According to an article in CoinTelegraph, Bitcoin with its proof of work algorithm is using 0.13% of the global energy consumption, which is a non-negligible amount of power. The high use of energy for proof of work is a deliberate strategy to make a blockchain secure and for certain blockchains like Bitcoin, the difficulty keeps on adjusting every 2016 blocks and it can be argued that the power consumption might increase in the foreseeable future.

However, any analysis on the power consumption of proof of work networks needs to be in relation to what the blockchain is trying to achieve. In the case of Bitcoin, the latter is trying to complement or in some cases replace fiat currencies, and maintaining fiat currencies is also very expensive. Fiat currencies require the printing of money which is a very expensive task in itself, and require banks and financial institutions to exist and function properly to ensure that money as a medium of exchange and store of value works properly. Most of these costs are either not measurable or very difficult to measure and does not give a true indication of the cost of using fiat currencies.

In absolute sense, it can easily be argued that proof of work consensus algorithms and blockchains like Bitcoin and Ethereum are not working at the expense of the environment, but instead they are implementing groundwork for setting up energy-generating solutions which can be used in the long run for other purposes.

Why does it matter?

The proof of work consensus mechanism does not only address technical problems related to blockchains but instead is a robust system to partially or fully overcome problems related to societal problems originating from the Tragedy of the commons and Byzantine Generals’ Problem. Until now, blockchains using proof of work has been particularly resistant to different kinds of attacks and situations like soft and hard forks, irrespective of the number of participants or the number of transactions. Proof of work matters because it is currently the most stable, robust and decentralized consensus algorithm for blockchains.

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