What is Proof of Work?

Created by Ethos Support, Modified on Mon, 13 Feb, 2023 at 9:19 PM by Ethos Support

What is Proof of Work?

In simple terms, Proof of Work refers to the computational puzzle that miners solve for the prospect of receiving a coin in compensation for their work. The purpose of solving these puzzles is to secure the network through cryptographic hashing, which we will discuss later. In this sense, miners must directly work on the security and maintenance of the blockchain network as a whole, earning new coins by proving their work.

In this article we will provide you an in-depth overview of the Proof of Work scheme for blockchains, the ingenious conception of the idea itself and how the idea revolutionized peer-to-peer networks and the internet as a whole. We will also discuss the current state and issues with Proof of Work networks, as well as potential solutions within the blockchain community.

Cryptocurrency Mining, Miners, and Blockchain Security

Proof of Work as a network security concept starts with the understanding of networks. At the time of the release of the first Proof of Work blockchain, Bitcoin (which was also the first blockchain network as we know of it), peer-to-peer networks were the craze of internet technology. Prior to peer-to-peer and distributed networks, internet networks were centralized, that is, running communications and storing data in one single space. The innate issue with network centralization was and has always been that attackers will always know where to attack, since all the data is in a single location. Peer-to-peer networking rose to prominence as an alternative in which the network data was stored and network communications were done between nodes or users. Another name you may have heard for a peer-to-peer network is the cloud, or a cloud computing network.

All technological innovations have their own innate issues, and the first peer-to-peer networks were no different. As various tech companies released cloud storage networks, skeptics pointed out that while the networks offered more secure data storage, they still were controlled and secured by centralized organizations and corporations. Users still had to trust the security measures made by these central organizations. The centralization of maintenance and security of these networks by these companies also stirred up fear in the tech community over monopolization and economic control concerns. Soon enough, the skeptics got their answer to all of these issues in the form of the first blockchain network in 2009.

The first blockchain, Bitcoin, was proposed and launched by the anonymous Satoshi Nakamoto in 2009. In its whitepaper, Nakamoto described a system called “Proof of Work” in which any and all contributors could share their computing power through using loads of hardware to run algorithmic hashing software to secure transactions over the network. This process is known as mining, in which miners on the periphery use these hardware and software mining rigs to solve computational security puzzles through trial and error, guess and check. When a miner solves one of these puzzles, their solution will be used to encrypt a transaction on the network onto a new block in the network’s immutable public ledger. The transactions made on Bitcoin’s blockchain were solely the exchange of a digital currency, Bitcoin, and in reward for their computational efforts these miners are rewarded newly minted coins fresh off the network.

Ethereum, Smart contracts and Gas

In 2013, a young Vitalik Buterin took the idea of Proof of Work further when he released Ethereum. When Buterin first encountered the idea of Bitcoin and the blockchain, he saw the idea of a network for currency exchange as limited, only to be expanded by adding a variety of types of transactions to the network. The Ethereum blockchain offered the Ethereum Virtual Machine and its Turing-complete language Solidity as a new blockchain sandbox in which developers could customize any type of self-executing digital transaction. These self-executing digital transactions are known as Smart Contracts, and have an unlimited number of potential uses. In the Ethereum white paper, Buterin described potential uses such as supply chain, voting systems, financial auditing systems and many more.

Just like its customizability, the Proof of Work scheme utilized on Ethereum was a new and different feature. To make transactions over the Ethereum network, the contract sender must pay gas to the network. Gas is a small fraction of an Ethereum token which will be used to pay the miners on the network for securing the transaction on the blockchain.

The amount of gas a sender must pay for the execution of their smart contract depends on the size of the transaction; transactions that are more costly require more gas, and if the gas is not paid, then the transaction will not occur. In this modification to the Proof of Work scheme, Buterin used the economic principle of scarcity to protect the computational resources and improve the efficiency of the Proof of Work scheme on the Ethereum blockchain.

Issues with Proof of Work

As noted previously, all technological innovations come with innate issues, and Proof of Work is no different. While Proof of Work decentralized the security efforts of peer-to-peer networks and Ethereum improved the efficiency and economics of Proof of Work, Proof of Work raises issues of barriers to entry in its mining process. Most miners as we know contribute their efforts to blockchain networks in the search of profit. Since electricity, hardware and software bills can be costly for some (and cheap for others, depending on your geographic/political location and your access to electric power), mining is a difficult field to enter without a great deal of financial capital.

What makes things worse is that Proof of Work blockchains make the computational puzzles required for block encryption exponentially more difficult as more and more puzzles are solved. From here it is fair to draw conclusions that the security efforts behind Proof of Work blockchains become more centralized and conglomerated over time as they become more widely used for transactions.

In response to these issues, a number of new Proof schemes have risen in various new blockchains in the blockchain community. Innovators in the Proof of Burn, Proof of Research and Proof of Stake arena are working hard everyday to bring about a more decentralized approach to peer-to-peer networking by building on the foundations that Satoshi Nakamoto laid out for us with the release of Bitcoin.

Currently, each solution has its own merits and drawbacks, and we are working everyday to find a solution that can iterate on the Bitcoin Proof of Work system or even replace it by bringing about a more fair, decentralized security contribution system.