TL;DR
Proof of Work is a popular consensus mechanism adopted by major blockchains to secure their network. Bitcoin is one of the most successful blockchains to adopt this form of consensus mechanism.
Proof of work (PoW) is used in Bitcoin to validate transactions and secure its network. To achieve consensus, a process called mining is used to reach a distributed consensus on the blockchain. Every Bitcoin transaction must be verified and validated by miners, which requires considerable computational power. Miners are rewarded in BTC when they successfully verify a block, which will be added to the blockchain. Aside from this, PoW also helps in preventing double-spending.
If a miner is able to solve a computational problem first then they will be rewarded with 6.25 as of May 2022.
Introduction
In order to ensure blockchains transactions are valid, many networks use different forms of consensus mechanisms. Proof-of-Work (PoW) is one of the oldest and more popular ones out there. It is employed in order to validate transactions in a decentralized way. PoW was created by Satoshi Nakamota and it is considered to be one of the safest out there.
Many popular blockchains use PoW. Aside from Bitcoin, Litecoin and Ethereum are two popular blockchains who utilize this consensus mechanism. Although, it is worth noting that Ethereum plans on moving over to a Proof-of-Stake (PoS) consensus mechanism.
What Is Proof-of-Work?
Proof of Work is a consensus mechanism adopted by popular blockchains that prevents double-spending. Double spending in the crypto sense is a potential issue in blockchain where the same funds are spent to two different addresses at the same time. Satoshi Nakamoto introduced this in Bitcoin which was published in 2008. Users can find the whitepaper here.
Proof of Work, also referred to as PoW, is a validation system used by the Bitcoin network to confirm transactions and add them to the public ledger known as the blockchain. Essentially, it’s the cryptographic puzzle that miners need to solve in order for transactions to be considered officially completed. It validates transactions without the need of a 3rd party in a trustless way.
How Does PoW Work?
Transactions on a PoW network are verified by miners, who are participants that use a great number of resources to ensure the network continues to run securely and correctly. Among other tasks, miners create and validate blocks of transactions. To create this block they need to use a highly specialized mining hardware that solves complex mathematical puzzles.
Any miner that is able to solve these complex mathematical problems first will have the right to add the next block to the chain. In the Bitcoin blockchain, the miner who accomplishes this first will be rewarded with 6.25 BTC as of May 2022. This is called block rewards. Block rewards are a mixture of newly minted BTC as well as transaction fees. Each blockchain rewards differently and may have a different way to calculate the rewards. For instance, continuing on the Bitcoin blockchain, miners who are able to solve this problem will be rewarded with 6.25 BTC along with some transaction fees as of May 2017.
Bitcoin’s block reward is slashed by half every four years or about 210,000 blocks. This is due to a mechanism called Bitcoin halving.
It is important to keep in mind that every blockchain that utilizes the PoW consensus mechanism has different block rewards. It is advice that you DYOR when navigating through crypto mining in a Proof of Work network.
How To Mine In PoW?
Generally speaking in order to engage in mining and verify transactions you will need two things. A mining rig/computational power and electricity. The higher the computational power the more likely you are to be selected as the miner to validate the transactions. Using this computational power miners compete for the right to validate the next block in the blockchain.
As for the mining equipment utilized for mining, there is professional hardware that exists for this. Equipment such as ASIC, GPU, AND CPU are needed in order to mine these blocks. The first miner to solve this problem will be rewarded with the native cryptocurrency. For BTC miners it will be Bitcoin.
Further, the network is secured by the computational power that is given by miners. This is known as the hash rate. The greater the hash rate the more secure the network is because it shows there is a large amount of miners validating the transactions.
Proof of Work Risks
Although PoW provides a secure and reliable way to validate transactions on a blockchain, it is important to note that there are still some risks involved. One of them is centralization.
PoW Centralization Risk
Proof of Work blockchains are driven by mining. Mining involves competition among miners who are attempting to solve a mathematical problem that results in the generation of new coins. For major cryptocurrencies today, the solutions are getting more challenging to find and the process of guessing massive amounts of hashes can be expensive in terms of hardware and electricity.
Therefore, there are miners who rather pool their mining resources together in mining pools in order for them to have a greater chance of solving the problem and earning block rewards.
Some mining pools invest millions of dollars and control thousands of ASICs equipment to have the best hashing power. This inevitably leads to a greater chance at being able to solve the computational problem which leads into the block rewards. As of May 2022, the top 4 mining pools control over 60% of the total Bitcoin hash rate. The domination of these pools makes it harder for individual crypto enthusiasts to partake in the mining process. In fact, it causes concern due to the centralization of hash rate within 4 mining pools.
Although, there is still no single entity that controls more than 51% of the hash rate, it could cause some concern with centralization of the hash rate. One concern of this could be a 51% attack.
PoW and the 51% Attack Risk
If there was a single entity that controlled 51% of the hash rate then there could be security concerns on the network. One can argue that currently, especially on the Bitcoin network, although decentralized, mining isn’t heavily decentralized. A 51% attack is a malicious attack by the company or entity that owns over 50% of the hashing power in any PoW network. This attacker can override the consensus algorithm to launch an attack on the network that could benefit the attacker. Some of the malicious acts this attacker can engage in are double-spending, altering of transactions, or preventing other miners from mining on the network. If such actions do take place then it will reduce the trust in the overall network.
As mentioned above, mining is heavily concentrated between 4 mining pools. Furthermore, mining equipment producers as well as energy producers dominate the mining market and reduce the overall decentralization of a Proof of Work consensus system. This centralization can cause some concern for the overall network of the security. Nevertheless, due to the size of the network, especially Bitcoin, it is unlikely that it occurs.
How To Become A Miner on Bitcoin?
To start as a miner there are generally three things that you need to have. A wallet, the mining software, and the mining hardware. For this example we will be using Bitcoin and its blockchain.
Compatible Wallet
The wallet is essential since any of the Bitcoin you own while mining can be sent and stored properly.
Mining Software
Most mining software is essentially free. You can select a mulitude out there but one of the most common ones is CGMiner. The popular software runs on Windows, Max, and Linux. This software includes things such as remote interface, multi-GPU support, fan speed control among other things.
Mining Hardware
While it is true you can use your old laptop or computer, it is unlikely that you will ear any BTC unless you invest in more powerful hardware.
Investing in a strong and very powerful mining computer is essentially in order to start mining BTC. Some of the more specific ones can range up to $15,000.
Final Thoughts
With Proof of Work, Bitcoin and other blockchains who utilize this consensus mechanism proved that we don't need centralized instituions to prevent double spend. Bitcoin essentially solved the issue with double spending in a decentralized way. Thus, through a crypto wallet, mining software and mining hardware, participants in a decentralized system can come to an agreement on a financial database.
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