What is the Proof-of-Work (PoW) algorithm in cryptocurrencies?

Main

• Proof-of-Work is an algorithm by which a new block is added to the blockchain, transactions are confirmed, and a single version of the registry is verified in all its copies that are stored by separate nodes.
• The PoW mechanism was the first cryptocurrency consensus algorithm. It was this mechanism that Satoshi Nakamoto used to create bitcoin.
• The introduction of Proof-of-Work solved the problem of double spending, and the economic incentive provided in the algorithm became the basis for the emergence of the Bitcoin mining industry.

The essence of Proof-of-Work

The Proof-of-Work concept is an algorithm for protecting distributed systems from abuse (DoS attacks, spam mailings, etc.), the essence of which boils down to two main points:

1. the need to perform a certain rather complex and lengthy task;
2. the ability to quickly and easily check the result.

PoW tasks are not originally intended for humans, their solution by a computer is always achievable in a finite time, but it requires large computing power. At the same time, verification of the obtained solution requires much less resources and time.

Who and when coined the term Proof-of-Work

The concept of Proof-of-Work was first described in 1993 in rabote “Pricing via Processing, Or, Combatting Junk Mail, Advances in Cryptology.” Although the term itself has not yet been used in the article, the authors proposed the following idea:

“In order to access a shared resource, the user must calculate some function: quite complex, but feasible; this way you can protect the resource from abuse.

In 1997, cryptographer and future Blockstream founder Adam Back launched the project hashcashabout spam protection. The task was formulated as follows: “Find a value x such that the SHA(x) hash would contain N leading zero bits.”

The system offered partial inversion hashing when emailed. It takes about 2 to calculate the corresponding header⁵² hash calculations that need to be recalculated for each send. And if for several ordinary letters additional calculations do not create obstacles, then the need for constant recalculation makes mass mailing of spam very resource-intensive. At the same time, the correctness of the calculated code is checked very quickly: a single SHA-1 calculation with a pre-prepared label is used.

The term Proof-of-Work itself appeared in 1999 in an article ”Proofs of Work and Bread Pudding Protocols” (by Markus Jacobsson and Ari Juels) in Communications and Multimedia Security.

How Proof-of-Work is used in cryptocurrencies

Satoshi Nakamoto used the concept of PoW in the first cryptocurrency – bitcoin. He took the idea of ​​Hashcash, adding to it the mechanism of changing complexity – decreasing or increasing N (the required number of zeros) depending on the total power of network participants. The computed function became SHA-256.

Major Achievements of the PoW Algorithm

Before bitcoin, there were numerous attempts to create a decentralized system that would allow transfers to be made and verified without the need for a central operator.

However, no project could solve the problem of double spending – the possibility for the sender of the transfer to spend the same funds twice before the system confirms them.

This problem was solved only in bitcoin – using blockchain technology and the Proof-of-Work (PoW) consensus algorithm, which encourages miners to verify each transaction before it is added to the ledger. At the same time, this economic incentive also allows you to maintain the operation of the entire blockchain.

What affects the complexity of calculating a new block

In the Bitcoin network, the computational complexity for adding a new block is a dynamic parameter. It is set at such a level that the block generation rate remains approximately at the same level, no matter how powerful the equipment used for mining is.

At the same time, the verification of the calculation results remains simple. The nodes can always make sure that the miner found the correct value, but since the process of finding the block is costly and random, it is impossible to predict exactly which miner will solve the problem and mine the next block.

In order for the system to recognize a block as valid, it is necessary that its hash value be less than the current target. Thus, each block shows that some work has been done to find it.

The new block contains the hash of the previous block, forming a chain. It is impossible to change the block, you can only create a block at the same height, which will contain the hash of the previous block. To do this, you need to do the work of finding all the previous blocks. The high complexity of this process protects the blockchain from unauthorized access and double spending.

Proof-of-Work and mining

Proof-of-Work, in fact, spawned the Bitcoin mining industry and became an impetus for the development of specialized equipment – ASICs, since the computing resources spent on hashing blocks are huge and far exceed the power of the largest supercomputers.

At the same time, there was the notorious “reverse side of the coin”: quite quickly, PoW turned into a monster that devours electricity in the race for profitability.

The power of mining equipment is constantly growing, and the number of participants in this industry is also increasing. As a result, the total energy consumption increases. However, the energy efficiency of miners is also increasing, and the share of bitcoin in global electricity consumption remains low in 2022.

Top PoW cryptocurrencies

According to CoinMarketCap at the end of August 2022, the crypto projects with the largest market capitalization operating on the Proof-of-Work mechanism were: