What is the proof-of-work (PoW) algorithm?

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3 years ago

What is the proof-of-work (PoW) algorithm?

Key points

Proof-of-work (PoW) is the algorithm by which a blockchain adds a new block, confirms transactions and verifies a single version of the ledger across all its copies held by individual nodes.
PoW was the first consensus mechanism in cryptocurrency; Satoshi Nakamoto used it when creating bitcoin.
Introducing proof-of-work solved the double-spending problem, and the economic incentive built into the algorithm underpinned the rise 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 and the like). It rests on two main points:

a requirement to perform a task that is sufficiently complex and time-consuming;
the ability to verify the result quickly and easily.

PoW tasks are not intended for humans. A computer can always solve them within finite time, but doing so requires substantial computing power. Verifying a purported solution, by contrast, takes far fewer resources and much less time.

Who coined “proof-of-work”, and when

The concept of proof-of-work was first described in 1993 in the ра б оте “Pricing via Processing, Or, Combatting Junk Mail, Advances in Cryptology”. Although the term itself was not yet used, the authors proposed the following idea:

“To gain access to a shared resource, a user must compute some function: sufficiently difficult, yet feasible; in this way the resource can be protected from abuse.”

In 1997, cryptographer and future Blockstream co-founder Adam Back launched Hashcash, a project aimed at combating spam. The task was stated as: “Find such a value x that the hash SHA(x) would contain N leading zero bits.”

The system proposed partial hash inversion for email. Computing the appropriate header takes about 2⁵² hash evaluations, which must be recomputed for every send. While a few ordinary emails pose no obstacle, the need to recompute constantly makes bulk spam very resource-intensive. Verifying a computed code, however, is very fast: it uses a single SHA-1 evaluation with a preprepared stamp.

The term proof-of-work appeared in 1999 in the paper ”Proofs of Work and Bread Pudding Protocols” (by Markus Jakobsson and Ari Juels) in Communications and Multimedia Security.

How proof-of-work is used in cryptocurrencies

Satoshi Nakamoto applied the PoW concept in the first cryptocurrency, bitcoin. He took the Hashcash idea and added a variable difficulty mechanism—reducing or increasing N (the required number of zeros) depending on the network’s aggregate computing power. The function used was SHA-256.

A blockchain is a network of distributed nodes, each holding its own copy of the ledger. The consensus algorithm enables any node to check that a miner (a node that adds a new block to the blockchain) has indeed performed the necessary calculations.

The process involves trying to find a hash of the block header (the part of the block that contains a reference to the previous block and a summary of the transactions included) whose value meets the current difficulty.

Put simply, PoW is the procedure that allows all nodes to agree on a single version of the blockchain and to confirm new transactions in the next block. It also governs the issuance of new coins. Mining is part of PoW.

What PoW achieved

Before bitcoin, there were repeated attempts to create a decentralised system that could process transfers and verify them without a central operator.

None of those projects could solve the double-spending problem—the chance for a sender to spend the same funds twice before the system confirms them.

Bitcoin solved it with blockchain technology and the proof-of-work (PoW) consensus algorithm, which incentivises miners to verify every transaction before it is added to the ledger. Those incentives also keep the entire blockchain running.

What difficulty means for new blocks

In the bitcoin network, the computational difficulty for adding a new block is a dynamic parameter. It is set so that the rate of block generation remains roughly constant, no matter how powerful the mining hardware becomes.

Verification of results remains simple. Nodes can always check that a miner found a correct value, but because block discovery is costly and random, it is impossible to predict which miner will solve the puzzle and mine the next block.

For the system to accept a block, its hash must be lower than the current target. Each block thus demonstrates that a certain amount of work went into finding it.

A new block contains the previous block’s hash, forming a chain. You cannot change a block; you can only create a block at the same height that contains the previous block’s hash. Doing so requires repeating the work of finding all previous blocks. The high difficulty of this process protects the blockchain from unauthorised access and double-spending.

Proof-of-work and mining

Proof-of-work, in effect, spawned the bitcoin-mining industry and spurred the development of specialised ASIC hardware, because the computing resources spent on hashing blocks are enormous—far exceeding those of the largest supercomputers.

There is also a downside: PoW quickly turned into a glutton for electricity in the race for profitability.

Mining hardware keeps getting more powerful, and more participants join the industry. As a result, aggregate energy consumption rises. Miners have also become more energy-efficient, and bitcoin’s share of global electricity consumption remained low in 2022.

Major PoW cryptocurrencies

According to CoinMarketCap at the end of August 2022, the largest-capitalisation crypto projects using proof-of-work were:

Bitcoin (BTC);
Ethereum (ETH) — until its transition to proof-of-stake;
Dogecoin (DOGE);
Ethereum Classic (ETC);
Litecoin (LTC);
Monero (XMR);
Bitcoin Cash (BCH);
Bitcoin SV (BSV);
Zcash (ZEC);
Kadena (KDA).