Proof-of-Work Consensus Algorithm in Crypto and Blockchain, Explained

As the crypto world continues to grow, it’s crucial to have a basic understanding of the technologies that power it. In this blog post, we’ll take a look at the proof-of-work consensus algorithm. We’ll discuss what it is, how it works, and some of its benefits and drawbacks. By the end of this article, you’ll be better equipped to make informed decisions about which cryptos to invest in. So, without further ado, let’s get started!

What Is Proof-of-Work Consensus Mechanism?

The key idea of the blockchain is that intricate work needs to be done to add a new block to the chain. This complex work enhances data security and makes the blockchain reliable and holistic. Last but not least, carrying out this work is incentivized by rewards — this is how people get coins for mining.

Proof of Work (PoW) was the first successful decentralized blockchain consensus mechanism. PoW is used in Bitcoin, Ethereum (which is currently switching to Proof of Stake), Litecoin, ZCash, Monero, and many other blockchains. 

The most famous cryptocurrency consensus mechanism works as follows: at the beginning, network users send digital tokens to each other, then all transactions made are collected in blocks and recorded in a distributed open registry — a blockchain.

PoW relies on computational power, and all the transactions are proven with the help of complicated mathematical calculations, whose validity can be verified by any network user. Miners solve the problem, form a new block, and confirm transactions. The tasks become more difficult each time as the number of users grows, and the load on the network increases. 

Hashing means converting input of any length and size in the source line into the output of a fixed length specified by the algorithm’s hash function. In the context of cryptocurrencies, such as Bitcoin, transactions after hashing at the output look like a set of characters defined by the length algorithm (Bitcoin uses SHA-256).

The hash of each block contains the hash output of the previous block. This increases the security of the system and ensures that the order of created blocks cannot be violated. The miner must first correctly determine “nonce” — the number added to the end of the line to create a hash that starts with the required number of zeros. If the miner manages to solve the problem, a new block is formed: the next set of transactions is placed in it, and they are considered confirmed.

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What Is the Purpose of PoW?

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Consensus algorithms are designed to validate transactions and create new blocks by checking the accuracy of the actions taken.

The accuracy and speed of the blockchain network depend on this mechanism. At the same time, the problem should not be too complicated. Otherwise, block generation will take too much time, and many incomplete transactions will hang on the network.

If the problem cannot be solved in a timely manner, creating blocks will be a fluke. However, if the problem is solved too easily, the system will become vulnerable to abuse, spam, and DoS attacks. 

The solution should be easily validated. Otherwise, not all nodes will understand whether the calculation was carried out correctly, which means that they will have to trust other nodes, and that is not consistent with one of the essential principles of the blockchain — full transparency.

Proof of Work: Strengths and Drawbacks

This algorithm is honest and understandable. It can be trusted.

One advantage of PoW is that it is secure. Security comes from the fact that it is hard to solve the puzzles. If someone did find a way to solve the puzzle quickly, they would still need to do a lot of work to find all the correct answers. This makes it very unlikely that anyone will be able to cheat the system. 

PoW problems are not originally designed for humans: a computer is supposed to solve them in a finite time, yet it requires a lot of computing power. At the same time, verification of the obtained solution requires much less time and resources.

Another advantage of PoW is that it is flexible. The puzzles can be designed to be easy or hard, depending on how much work needs to be done. This means that the system can be adapted to different needs and goals.

Finally, PoW is cost-effective. Because it does not require special equipment or training, it can be used by anyone with a computer. This makes it an attractive option for companies and organizations looking to save money.

Attacks on blockchain networks

While this system has its advantages, there are also some potential drawbacks. Major problems here are enormous expenses and a 51% attack.

It requires a colossal amount of mining power: in 2017, an average of 163 kW/h of energy was required to complete a single transaction in the Bitcoin network. This amount of energy can cover the needs of a family of three living in a small one-story house for 5.5 days. This means that it is not accessible to everyone and could lead to centralization among those who have the resources to participate.

Also, those miners with faster and more powerful ASICs get more than the rest. As a result, Bitcoin is not as decentralized as it was originally intended.

Additionally, because the equations are so complex, they require specialized hardware and software. This creates an entry barrier for many people and could lead to further centralization. Overall, Proof of Work is a controversial system with both positive and negative aspects. However, it remains one of the most popular methods for earning cryptocurrency.

PoW Consensus Algorithm Use Cases

Where is POW used? In many cryptocurrencies. Of course, the most famous of them is Bitcoin, and it was Bitcoin that set this trend. It uses the Hashcash algorithm, which allows you to change the complexity of the task depending on the network’s total computing power. 

The average block formation time is 10 minutes. A similar system is implemented in bitcoin-like cryptocurrencies, for example, in Litecoin. Another major project that uses PoW is Ethereum. Considering that almost three quarters of all blockchain projects are implemented on this platform, we can confidently say that most applications use a consensus model with proof of work.

Proof of Work vs. Proof of Stake

Source: financialhorse.com

To confirm transactions, Proof of Stake requires participants to share a portion of the coins they store online. PoS is an alternative to the PoW algorithm, first implemented in 2012 in the PPCoin cryptocurrency (renamed PeerCoin). The idea behind Proof of Stake is to solve the proof-of-work problem associated with high energy costs.

Validators confirm the validity of completed transactions. The advantage of PoS is that it is more energy-efficient and perhaps better at preventing attacks than PoW.

Validators stake their coins by locking them up. The mixer used to complete the block is selected in proportion to the value set on the network. Proof of Stake prevents network disruption by granting verification authority to the most active and engaged users. The PoS consensus algorithm is used in Peercoin and Decred and will soon be applied in Ethereum, where the transition from one algorithm to another has been predetermined in advance.

You can learn more about the PoS consensus algorithm in this article.

What Are Other Consensus Mechanisms There in Cryptocurrencies?

Proof of Work and Proof of Stake are considered the two most popular consensus algorithms in the world of cryptocurrencies. However, several mechanisms have their subtleties and features.

Their list may be quite extensive, so we list a few of the most famous:

  • Delegated Proof of Stake is a generic term that describes the evolution of basic consensus protocols based on stake confirmation. DPoS is used in BitShares, EOS, and Tezos.
  • Proof of Authority is a reputation-based consensus algorithm that provides a practical and efficient solution for blockchains (especially private ones). 
  • Zero-Knowledge Proof is a cryptographic protocol that allows one side (the prover) to confirm the truth of the statement to the other party (the verifier) without disclosing any additional information about it (neither the content nor the source from which the prover learned about the statement). 

Bottom Line

In conclusion, it is worth noting that various consensus methods are being developed, each with its own advantages and disadvantages. It should be emphasized that the security of any protocol depends largely on the developers implementing it. At present, the most profitable option seems to be a combination of PoS and PoW algorithms. Additionally, there are other promising methods like Proof of Capacity and Proof of Storage, which use real resources to confirm actions in the system.


Disclaimer: Please note that the contents of this article are not financial or investing advice. The information provided in this article is the author’s opinion only and should not be considered as offering trading or investing recommendations. We do not make any warranties about the completeness, reliability and accuracy of this information. The cryptocurrency market suffers from high volatility and occasional arbitrary movements. Any investor, trader, or regular crypto users should research multiple viewpoints and be familiar with all local regulations before committing to an investment.