Proof of Work algorithm – part 2

We continue to discuss the operation of the PoW algorithm; you can read the details in the first part of the material. And here we will continue.

Advantages of the Proof of Work algorithm

In honor of the creator of Bitcoin, the PoW algorithm was named Nakamoto consensus. This set of rules controls the miner’s proof of work through a signature. Additionally, it modifies the proof difficulty level in a way that controls the hashrate of the cryptocurrency network.

Experts highlight the following advantages of the Proof of Work algorithm:

– it is impossible to falsify or transfer the proof obtained through PoW to other blockchain blocks;

– prevents the “Sybil” attack – the creation of a large number of false nodes, the computing power of which in total exceeds the capabilities of real nodes. As a result, the attacker’s computing processes receive priority. Today it is virtually impossible to implement the Sybil attack due to the need for colossal power. It cannot be emulated or faked;

– miners are provided with an incentive to work honestly without violating the rules of the Proof of Work algorithm. Mistakes or scarifications are punishable by loss of reward;

– fair mining of coins. The reward can be distributed among miners according to the amount of power invested in the system hashrate. The higher the amount of computing potential provided, the greater the size of the remuneration share;

– block proofs cannot be pre-generated. It is created solely on the basis of a previously closed element of the blockchain. There is always a connecting transition from the last filled block to the new one.

Also, thanks to the Nakamoto consensus, the system becomes censorship resistant. Due to decentralization, the cryptocurrency network is uncontrollable; it cannot be modified or blocks replaced.

Validity check is simple, therefore, the system still has a reserve of capabilities to maintain maximum objectivity. The Proof of Work algorithm controls the correctness of proofs of work if there is a blockchain and sufficiently powerful computing power of the device.

Where is PoW used?

The most famous example of the use of the Proof of Work algorithm is the Bitcoin system, as well as its networks of soft forks and hard forks. So dogecoin, litecoin, namecoin, bitcoin sv, zcash or other projects together with the BTC blockchain use PoW.

The Ethereum network is built on similar principles. ETH coins can also be mined. For most applications implemented on the Ethereum platform, the main set of rules is the Proof of Work algorithm.

Some popular crypto coins that use the proof of work principle (PoW consensus):

Blockchain system Hash algorithm Coin ticker
Quark 6-thread algorithm from SHA-3, Blake, JH, Grostl, Blue Midnight Wish and Skein. QRK
Bitcoin SHA256 BTC
Litecoin Scrypt LTC
Ethereum Ethash ETH
Monero CryptoNight XMR
Dash X11 DASH
Bitcoin sv SHA256 BSV
Zcash Equihash ZEC
Ethereum classic Ethash ETC
Bitcoin cash SHA256 BCH

Disadvantages of the Proof of Work algorithm

Since the set of rules that form the PoW algorithm is the first version of reaching consensus, it has many disadvantages.

1. Requires a lot of computing power. Hashing requires a significant amount of computing power on the device to mine cryptocurrencies on PoW. Today you won’t be able to mine Bitcoins or even Satoshis using old video cards.

You need modern ASICs or special high-power rigs, and they cost many thousands of dollars each. In addition to the costly part of the budget for equipment, there is an item with huge costs for electricity.

For example, one of the largest mining farms in Russia loses about 6,000,000 rubles on electricity bills alone.

2. Increased centralization of cryptocurrency networks. This problem depends entirely on the increase in mining difficulty. As the power parameter increases to sеlect a suitable hash, demand for equipment appears and its price soars.

Only a small number of companies and rare private individuals can purchase it. As a result, the power of mining farms increases, creating a threat to the centralization of networks if more than 51% are intercepted.

Crossing this border by one company or their association will allow:
– set your own rules;
– adjust the blockchain;
– block payments to other miners;
– and so on.

Network participants trying to mine coins alone have no chance of making money.

3. Useless calculations with high power consumption. Of the total number of mining participants, only one receives a block reward. The work of the rest, even 99% completed, remains useless for the cryptocurrency network. That is, these calculations with the PoW algorithm are actually done in vain.

Methods for redirecting the calculations made for other purposes have not yet been invented.

4. Hypothetical possibility of a “51%” attack. This scenario was briefly described a little higher. That is, if an attacker gains control over 51% or more of the power of the crypto network, he will be able to manipulate the blockchain and its functions.

4. Hypothetical possibility of a “51%” attack. This scenario was briefly described a little higher. That is, if an attacker gains control of 51% or more of the power of the crypto network, he will be able to manipulate the blockchain and its functions.

He will cancel transactions, adjust them, assign payments to himself and commit other similar frauds. Because its computing power is greater, the system will assign priority to its chain. The legal one will remain useless and miners will not receive anything.

Still, it is worth recalling that it is almost impossible to carry out a 51% attack on top crypto networks today. Their hashrate level is too high.

5. Ecological moment. The growing popularity of mining is causing a shortage of electricity in the market. Manufacturers are forced to increase generation to the limit. A lot of fossil fuels are burned for this, which pollutes the atmosphere, depletes resources, and changes the climate.

Conclusion: Proof of Work algorithm

Among all the options, PoW consensus is the most mature, the most well-known mechanism for controlling the operation of the blockchain of cryptocurrency projects. Some view it as an outdated way to ensure the functionality of distributed ledgers.

Of course, today new modifications and versions of consensuses appear, such as Proof of Capacity, Proof of Stake, Proof of Burn, etc. These algorithms are less expensive, accessible and sometimes more effective in solving certain problems.

If these alternative mechanisms continue to work successfully, it is likely that the Proof of Work algorithm will no longer be relevant. For example, since 2017 they have been trying to transfer the Ethereum system to the Casoer protocol, formed by the Proof of Stake algorithm.

However, until now, cryptocurrency No. 2 continues (in 2022) mainly to function on Ethash, which belongs to the Proof of Work algorithm. So far, avoiding negative prospects due to the growing complexity of the network is not possible.