Estimated reading time: 4 minutes
What is Proof of Work for cryptocurrency?
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The cryptocurrency and blockchain technology world might feel like somewhat of an enigma. Now, however, with new platforms, ways to buy and sell, and networks, it is becoming more accessible than ever.
In a business sense, this means that the adoption of cryptocurrency is coming thick and fast. But before you think about how to incorporate cryptocurrency networks into the business, understanding concepts like Proof of Work is key.
What is Proof of Work?
Proof of Work (or PoW) is one method of adding new blocks of transactions to the blockchain. To do this, crypto mining uses computational power to create a hash function, (a long sequence of numbers) that matches the specific hash code of the next block.
Therefore, Proof of Work encourages cryptocurrency miners to compete with one another. The miner who effectively guesses or works out the next code is rewarded with coins and transaction fees for their block.
The working protocol is to find the new hash key through trial and error, and it requires huge amounts of computer power to run through thousands of combinations per minute.
For example, the Bitcoin blockchain’s hash consists of 64 letters. Each new block is typically worked out within 10 minutes by Bitcoin miners.
It becomes a race to find the next key because the supply of any cryptocurrency coin is limited. For example, Bitcoin has a limited supply of 21 million coins, so bitcoin mining will not last forever.
Yet, even after the market cap is reached, each of the miners with hash keys will continue to earn transaction fees from the transactions in their block on the chain. The more blocks each miner earns, the more transaction fees they should also collect.
Why is Proof of Work important?
As a digital form of currency, cryptocurrency is vulnerable to the problem of ‘double spend.’
In the real world, it’s near impossible to spend the same pound coin in two places at once, since it is a physical object. However, since cryptocurrency is digital, there is a chance that the same units can be spent by a second network participant before the first is recorded onto the blockchain.
Moreover, Proof of Work allows cryptocurrency to remain decentralised. Without the involvement of a bank, challenger bank or building society to regulate things, digital cryptocurrencies rely on their distribution networks to verify transactions.
The possibility that anybody could technically be the ‘winner’ of the next key allows the concept to remain true to its original purpose.
Advantages and disadvantages
So, what do the miners gain from guessing the exact hash key of the next blockchains?
The major reward is the volume of coins of the specific cryptocurrency block they have the hash key for, and the transaction fees for their block for the rest of their lifetime. For example, Bitcoin network rewards like Bitcoin cash.
But the Proof of Work is also a highly secure way to verify transactions and is very difficult to be hacked or made vulnerable.
The major problem with Proof of Work, however, is its poor environmental impact through intensive computer power. This is the primary opposition to cryptocurrency in general, and the reason for debates over Bitcoin bans and increasing cryptocurrency regulation in recent years.
Since miners typically only have around 10 minutes to work out the next hash code, they must run thousands of combinations per minute to have a chance. This uses huge supplies of computing power, energy and expensive equipment.
Proof of Work vs Proof of Stake
As mentioned, Proof of Work through cryptocurrency mining is just one of the multiple ways to verify the security of cryptocurrency transactions. Another contender is known as Proof of Stake. This chooses validators based on the number of coins that they own, stake or have locked into the network.
Proof of Stake is considered more scalable than pow blockchain verification since it doesn’t require all the heavy lifting of computers and energy sources. Moreover, this way, transactions are processed faster and with lower fees for the user.
While it is a great validator, there is debate over the security of Proof of Stake. Coin owners who want to distribute their wealth through multiple accounts, for example, may not be able to verify that they own cryptocurrency on various platforms, such as Coinbase.
For now, at least, this is why Proof of Work is preferred by the general consensus mechanism for transaction verification.