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What is the Proof-of-Work (PoW) algorithm? | by Sunflower Corporation | Coinmonks | Sep 2022

Proof-of-Work is an algorithm that helps to add a new block to the blockchain, confirm transactions and verify a single version of the registry in all its copies, which are stored by individual nodes.
Why is it useful? Why do we need it? Let’s read together!

The PoW mechanism was the first cryptocurrency consensus algorithm. Satoshi Nakamoto used this mechanism when he created bitcoin.

The introduction of Proof-of-Work allowed the problem of double spending to be solved, and the economic incentive provided by the algorithm became the foundation for the emergence of the bitcoin mining industry.

The Proof-of-Work algorithm is a method for protecting distributed systems from abuse (dos attacks, spam mailings, and so on), the essence of which boils down to two main points:

1. Requirement to complete a rather complex and time-consuming task;

2. Possibilities to check the outcome quickly and easily.

PoW tasks were not designed for humans; Their solution by a computer is always achievable in a finite time, but it requires a large computing power. At the same time, verifying the received solution necessitates far fewer resources and time.

The Proof-of-Work concept was first described in 1993 in the work “Pricing via Processing, Or, Combatting Junk Mail, Advances in Cryptology”. Although the term itself wasn’t used in the article, the authors proposed the following idea:

The main idea is to require a user to compute a moderately hard but not intractable function in order to gain access to the resource thus preventing frivolous use.”

In 1997, Adam Back, A cryptographer and future founder of Block stream, launched the Hashcash project, which was dedicated to spam protection. The problem was formulated as follows: “Find a value of x such that the hash SHA(x) would contain N high zero bits.”

When sent via email, the system provided partial inversion hash. About 252 hash calculations are required to calculate the corresponding header, which must be recalculated for each submission. And, even if additional calculations do not cause problems for a few ordinary emails, the need for constant recalculation makes spam mass mailing very resource-intensive. At the same time, the calculated code’s correctness is checked quickly: a single SHA-1 calculation with a pre-prepared label is used.

The term Proof-of-Work appeared in 1999 in an article “Proofs of Work and Bread Pudding Protocols”

How is Proof-of-Work used in cryptocurrencies

Satoshi Nakamoto used the PoW concept in the first cryptocurrency — bitcoin. He took the Hashcash concept and added a varying complexity mechanism — reducing or increasing N (the required number of zeros) based on the total capacity of the network participants. The computed function was SHA-256.

The blockchain is a network of distributed nodes (nodes), each with its own copy of the registry. The consensus algorithm ensures that each node has the ability to verify that the miner (another node that adds a new block to the blockchain) has performed the necessary calculations.

This process entails attempting to find the hash of the block header (the part of the blockchain that contains a link to the previous block as well as the summed value of transactions included in it), whose value corresponds to the current level of complexity.

PoW is a procedure that allows all nodes to agree on a single version of the blockchain and confirm data on new transactions in a new block. It is also in charge of the creation of new coins on the blockchain. Mining is a component of the PoW algorithm.

Prior to bitcoin, numerous attempts were made to develop a decentralized system that would allow transfers and verification without the need for a central operator.

However, no project could address the issue of double spending, which occurs when the sender of a transfer spends the same funds twice before the system confirms them.

Only bitcoin solved this problem by utilizing blockchain technology and the Proof-of-Work (PoW) consensus algorithm, which encourages miners to verify each transaction before it is added to the registry. At the same time, this economic incentive allows you to contribute to the overall operation of the blockchain.

The complexity of calculations for adding a new block is a dynamic parameter in the bitcoin network. It is set at such a level that the block generation rate remains roughly constant regardless of how powerful the mining equipment is.

Simultaneously, checking the results of calculations remains straightforward. Nodes can always ensure that the miner has found the correct value, but because the process of finding a block is expensive and random, it is impossible to predict which miner will solve the problem and receive the next block.

In order for the system to recognize a block as correct, its hash value must be less than the current target. As a result, each block demonstrates that some effort was expended in order to locate it.

The previous block’s hash is included in the new block, forming a chain. It is impossible to change the block; you can only create a block of the same height that contains the previous block’s hash. To do so, you must first find all of the previous blocks. This process’s high complexity protects the blockchain from unauthorized access and double spending.

Proof-of- Work, in fact, gave birth to the bitcoin mining industry and fueled the development of specialized equipment — ASIC — because the computing resources expended on hashing blocks are massive and far exceed the capacity of the most powerful supercomputers.

At the same time, it had the infamous “reverse side of the coin”: in the race for profitability, PoW quickly turned into a monster devouring electricity.

Mining equipment capacity is constantly increasing, as is the number of participants in this industry. As a result, overall energy consumption rises. However, miner energy efficiency is improving, and bitcoin’s share of global electricity consumption remains low in 2022.

According to CoinMarketCap at the end of August 2022crypto projects with the largest market capitalization operating on the Proof-of-Work mechanism were:

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