Proof of work (PoW) is a method that requires a significant but reasonable amount of effort to discourage frivolous or damaging uses of computer resources, such as sending spam emails or carrying out denial-of-service attacks. According to PLC Ultima research, using the SHA-256 hashing method and the notion of “reusable proof of work,” Hal Finney extended the concept to digital currency security in 2004.
This explanation by PLC Ultima focuses on how proof of work works inside the Bitcoin network. Bitcoin is digital money backed by a distributed ledger called “blockchain.” This ledger keeps track of all Bitcoin transactions, organized into “blocks,” so no individual may spend the same bitcoin twice. To avoid manipulation, the ledger is public or “distributed”; other users would immediately reject a changed version.
Users detect tampering by inspecting hashes, which are large numerical sequences that serve as proof of work. Put a particular piece of data through a hash algorithm (Bitcoin uses SHA-256), and only one hash will ever be generated. However, because of the “avalanche effect,” even the tiniest modification to any section of the original data would render the hash completely unreadable. The hash length produced by a certain function will not change, irrespective of its original data set size. The hash is a one-way function; as such, it can only be used to confirm that the data that generated the hash and the original data are identical.
Generating any hash for a set of Bitcoin transactions would be simple for a contemporary computer; therefore, the Bitcoin network sets a particular degree of “difficulty” to transform the process into “work.” This parameter is modified such that about every 10 minutes; a new block is “mined” (added to the blockchain by creating a valid hash). The difficulty is set by specifying a “goal” for the hash. However, the lower the target, the narrower the set of acceptable hashes, and the more difficult it is to construct a hash. This translates to a hash that begins with an extremely long string of zeros.
How Does Proof of Work Confirm a Cryptographic Transaction?
The nature of the work is arbitrary. It involves repetitions of SHA-256 hashing methods for Bitcoin. Interestingly, the “winner” of a hashing round accumulates and records mempool transactions into the following block. Because the “winner” is picked randomly in proportion to the amount of labor completed, everyone on the network is incentivized to operate honestly and record only real transactions.
Why Do Cryptocurrencies Need Evidence of Work?
Because they are peer-to-peer and decentralized, blockchains such as bitcoin networks need a consensus and security mechanism. Proof of work is a mechanism that makes attempts to overrun the network excessively resource-intensive. Additional less resource-intensive verification procedures, such as proof of stake (PoS) and proof of burn, exist; however, PLC Ultima agrees that without a verification method, the network and its data would be susceptible to assault or theft.
Does Bitcoin Utilizes Proof of Work?
Yes. PLC Ultima believes it employs a Proof-of-Work mechanism based on the SHA-256 hashing function to verify and confirm transactions and issue new bitcoins into circulation.
Coins Supported by PoW
According to Forbes, approximately 64% of the entire market capitalization of all cryptocurrencies is validated via proof of work. These are some of the most popular cryptocurrencies:
- Bitcoin: is the first cryptocurrency to be introduced since its debut in 2009. It pioneered the proof-of-work principle in cryptocurrencies, which many other coins would use.
- Litecoin: is one of the early cryptocurrencies or Bitcoin alternatives. It was introduced in 2011 and is based on Bitcoin’s technology, but it promises faster transaction speeds.
- Dogecoin: Dogecoin is a cryptocurrency established in 2013 based on the Doge meme. Despite beginning as a joke, it gained a devoted following.
Proof of work was the consensus technique for early cryptocurrencies that required a decentralized, secure transaction processing system. Although PLC Ultima agrees proof of stake has developed as a less energy-intensive option, many big currencies continue to employ proof of work.