The proof-of-work or PoW system is a cryptographic zero-knowledge proof and consensus mechanism. The concept was first introduced by computer scientists Cynthia Dwork and Moni Naor in 1993. The actual term “proof of work” was used, described, and formalized in a 1999 paper by Markus Jakobsson and Ari Juels.
Proof-of-Work in Cryptocurrencies and Blockchains
Dwork and Naor envisioned it as a tool to deter denial-of-service attacks and other service abuses such as spam. Hal Finney adapted the concept in 2004 to secure digital money The introduction of Bitcoin in 2009 popularized its use. It eventually became the original consensus algorithm in permissionless blockchains and cryptocurrencies.
Bitcoin creator Satoshi Nakamoto
specifically implemented it as a consensus mechanism to prevent individuals or organizations from gaming the blockchain network. To achieve consensus, network participants need to solve a random mathematical puzzle.
PoW essentially works in the following manner: one party proves to others that a specific amount of computational effort has been used. The computation must be hard but feasible on the prover side but easy to check for the service provider or other participants.
Several blockchain platforms and cryptocurrencies are based on the PoW algorithm. These include version 1 of the Ethereum blockchain
, and the Litecoin
cryptocurrencies. It is used in validating transactions, maintaining and building further the entire blockchain or ledger of transactions, or in crypto-coin and crypto-token
PoW Pros: The Advantages of Proof-of-Work
The primary advantage of proof-of-work is that it provides a solid mechanism for achieving consensus and preventing abuses and misuses. Note that consensus is at the core of blockchain technology and its specific applications to include cryptocurrencies, as well as its benefits
such as security, trust and legitimacy, and decentralization.
Note that a blockchain is a decentralized or distributed database that represents a ledger of transactions. A peer-to-peer network of participants maintains the database by achieving consensus or agreeing on things like the order of transactions and account balances.
PoW fundamentally is a system for authenticating transactions without the need for a third party, as well as for preventing individuals or organizations from tampering with the database. The mechanism makes it difficult to alter any aspect of the ledger of transactions, thus ensuring the authenticity and traceability of each transaction.
There are other consensus mechanisms used in blockchain technology. These include proof-of-stake or PoS
and proof-of-burn or PoB. However, while PoS is more efficient, it has numerous flaws to include greater susceptibility to attacks and tampering.
A specific advantage of PoW is that it depends on computational capabilities. Although it is theoretically possible for an individual to tamper with the blockchain, doing so would require expending computing capabilities that are impractical and uneconomical to the point that the cost significantly outweighs the gains or benefits.
PoW Cons: The Disadvantages of Proof-of-Work
The biggest disadvantage of proof-of-work centers on the computational capabilities needed to solve mathematical problems in authenticating blockchain transactions. Note that this is also one of the biggest drawbacks of blockchain
, a major criticism of cryptocurrencies
, and the primary reason that PoW-based blockchains have negative environmental impacts
Of course, to participate in a blockchain network that utilizes PoW as a consensus mechanism, a party must have a powerful computer equipped with advanced hardware. Scaling the operation means purchasing and setting up more expensive computers.
But the cost does not rest alone in the aforesaid purchases. Powerful computers inherently consume a lot of energy. Furthermore, these machines require effective heat management or cooling system to remain operational and prevent overheating
, as well as associated damages to hardware components
due to internal heat build-up.
The same energy-intensiveness is also the reason behind the more specific disadvantages of proof-of-work. For example, because of the cost associated with running and maintaining powerful computer systems, PoW-based blockchains have scalability limitations.
In addition, the associated cost also prevents a number of individuals and organizations from participating in a particular blockchain network. Hence, while blockchain technology is based on the concept of decentralization through public participation, cost serves as a key barrier for the greater public to participate, thus creating some semblance of centralization.
The drawbacks of PoW collectively represent a major reason why other blockchain platforms have utilized alternative consensus mechanisms. Take the Cardano blockchain
for example. Note that the Ethereum blockchain will be moving from PoW to PoS.
A Note on Proof-of-Stake Consensus Mechanisms
Several blockchain platforms have applications beyond cryptocurrencies. Ethereum and Cardano are prime examples. Apart from having their native cryptocurrencies, their platforms also host more specific applications such as tokenization, decentralized finance and decentralized applications, and the creation of non-fungible tokens or NFTs
, among others.
The scalability limitation of proof-of-work slows down the transaction speed in a particular PoW-based blockchain. Hence, as a workaround, blockchains with more expansive applications are opting to employ proof-of-stake or PoS
as their consensus mechanism.
PoS does not expend computational power to solve mathematical problems. Instead, to authenticate transactions and achieve consensus, it works by enticing participants to put their cryptocurrencies and have them frozen. Because these participants have a stake in the platform, they are compelled to make it as secure as possible.
FURTHER READINGS AND REFERENCES
- Baraniuk, C. 2019. “Bitcoin’s Energy Consumption ‘Equals that of Switzerland.” BBC. Available online
- Dwork, C. and Naor, M. 1993. “Pricing via Processing or Combatting Junk Mail.” In Advances in Cryptology, pp. 139-147. Springer Berlin Heidelberg. DOI: 1007/3-540-48071-4_10
- Jakobsson, M. and Juels, A. 1999. “Proofs of Work and Bread Pudding Protocols.” In Secure Information Networks. Springer. DOI: 1007/978-0-387-35568-9_18
- S. 2008. Bitcoin: A Peer-to-Peer Electronic Cash System. Bitcoin.org. Available via PDF
- Saleh, F. 2020. “Blockchain without Waste: Proof-of-Stake.” The Review of Financial Studies. 34(3): 1156-1190. DOI: 1093/rfs/hhaa075