With the rapid growth and adoption rates of blockchain technology, more individuals are looking to slowly accrue wealth through investments in its several applications, such as cryptocurrencies and NFTs. However, there are valid concerns regarding the safety and security of such digital assets.
Concerns of this kind are given a lot of weight by instances of theft, malpractices and the lack of a satisfactory regulatory mechanism to govern and punish these attempts. Yet, an important aspect of the technology is its inherent ability to secure the asset in question through specific mechanisms.
These mechanisms are essential components of a blockchain network and dictate how users engage with it and accrue assets on it. One such mechanism is called Proof of Work (PoW) and is quite commonly used in blockchain-based assets as a security measure.
Essentially developed using the hashing algorithm SHA-256 in 2004 by Hal Finney, PoW was first applied to Bitcoin in 2009. Finney was the first recipient of Bitcoin for his contribution to its security!
It is essentially a digital consensus mechanism that allows blockchain networks to authenticate their transactions and discourage attempts to “game the system” by users with malicious intentions. This is accomplished by using the algorithm to generate an arbitrary puzzle or riddle that requires expending computational power to solve.
The puzzles that come from the algorithm can vary. They can be hash functions that require finding a specific input when only the output is known. Think of an algebraic equation with one side of the equation known, but the other side has so many possible solutions!
You could also encounter an integer factorization puzzle where the solution is the correct set of numbers that multiply to form a specific number. Guided tour puzzles task you to find correct functions for a defined set of nodes on the network.
While the puzzle seems to be the most interesting part of the system, it is only the part that faces the user, or miner, on a network. The bulk of PoW happens on the blockchain!
Each blockchain network organises its decentralised ledger into blocks, where new transactions are compared with previous transactions before being included in a new block.
Each block is thus a data set with a specific signature, or hash, which must match up with the unique hashes generated by previous blocks. Failure to do so suggests alterations to the network of some kind and potential malpractices!
It is now time to introduce the concept of Proof of Work to this already elaborate security mechanism. Using PoW, each block of data is protected by a puzzle or riddle, which, when successfully solved, generates a hash for the new block of data. Each hash serves as a long string of numbers and characters that can be hard to accurately duplicate without the previous hash.
This hash acts as a digital receipt for the user who successfully solved the riddle or puzzle, and authenticates their ownership of that specific block, which could be a cryptocurrency like Bitcoin, or another asset like an NFT, for example.
To put this in perspective, the hash for block #660000 worth 6.25BTH that was mined in December 2020 goes like this:
Future users and miners cannot tamper with that specific data block unless they possess the specific hash that authenticated it. It can be very challenging to do so because each block generates a new puzzle and a potentially new sequence. They would also need to alter the hashes for subsequent blocks of data to make the ledger add up, which can be next to impossible!
Each hash is unique, ensuring that even a small change to previous data sets generates an entirely new hash that will not match the sequence on a network. This acts as a deterrent to any sort of malpractice and as a way to identify them easily.
Having understood how PoW works on the network end, it is now necessary to understand how it works for the users on a blockchain network.
Solving the algorithm to obtain the hash for a specific block of data requires a lot of computational power. A blockchain network based on proof of work obtains this power from miners who run programs to solve the puzzle or riddle.
However, only one miner can solve the puzzle, building on all the power supplied by other network users. They input a value that is below the target output called a “nonce” or number once used to try and arrive at the right hash. The ownership of that block or reward is authenticated by the hash allowing one lucky individual to win the prize associated with that block.
It is in this manner that Proof of Work can protect a blockchain network from malpractices. It not only acts as a deterrent through its authentication mechanisms but is also very difficult to hack or break the protection it places around blocks of data on a network.
Doing so would require enormous amounts of power and resources, making it simply unprofitable to try and hack a blockchain network.
An obvious benefit of using Proof of Work to authenticate transactions on a decentralised ledger would be that of security. The challenges it presents to malicious users or attempts to misuse a blockchain network are considerable, and require a lot of firepower to break through.
Furthermore, considering that every user contributes a portion of power to the algorithm, it acts as an incentive for all of them to maintain an honest approach, considering that the winner is chosen almost randomly based on the amount of power they devote to solving the puzzle.
Another important factor is that authentication is automatic, allowing users on a network to seamlessly and securely maintain a decentralised ledger without the fear of tampering by other users. It elevates the experience and is a major contributor to the rapid growth and adoption that cryptocurrencies are currently seeing.
Equally important is that it does not matter how much money a user has on the network. Basically, PoW relies on computing power to generate each new block, which means that individuals cannot monopolise a blockchain network and must mine cryptocurrencies or other rewards on it.
However, the security Proof of Work offers a blockchain network comes at a cost. In this context, this cost is a literal amount of money in terms of transaction fees and energy usage. In addition to these limits on individuals looking to grow their wealth through mining cryptocurrencies, the high energy usage that comes with PoW can have a significant environmental impact as well.
Consider a situation in which a hundred people attempt to mine a single block on any blockchain network. A hundred high-powered systems running complex programs meant to solve the riddle or puzzle. However, only one such system can gain the reward, rendering the efforts of ninety-nine other systems obsolete.
When you think about that in terms of energy consumption and consider it against the significant volume of such transactions happening every minute around the world, those numbers add up and lend weight to the concerns surrounding the new craze around cryptocurrencies!
While PoW does indeed come with limitations, they are minuscule compared to its many benefits as an authentication mechanism for blockchain networks. Other alternative ways to authenticate transactions are currently in the palace with more on the way.
However, PoW remains the pioneer of authentication and is poised to continue being the go-to option for many blockchain networks. Knowing how it works can help potential investors understand their network of choice better and can hopefully help mitigate criticisms of blockchain networks as unsafe and risky.