Proof Of Work (PoW): Concept, Mechanism & Limitations

proof of work

Recently, the Ethereum Foundation announced its plan to switch from PoW to PoS consensus mechanism to reduce the network’s energy consumption by more than 90%. The announcement has triggered debates on the PoW consensus mechanism and its significance. While there are ongoing discussions about proof of work, a significant section of the crypto community still struggles to understand the concept of PoW. If you are also unfamiliar with the idea of PoW and how it works, let us give you a brief overview of the Proof of Work and its working mechanism.

Proof of Work is the most popular consensus mechanism to secure the blockchain. It validates the transactions before adding them to the blockchain network and prevents the double spending of the cryptocurrency. Cryptocurrencies are similar to digital data, which can be copied easily. To prevent fraud in terms of duplicity, i.e. to prohibit scammers from using the same crypto more than once, the consensus mechanism is developed. 

Mechanism of PoW (Proof of work):

Cryptocurrencies work on a decentralized distributed digital ledger known as blockchain technology. In the blockchain network, all the transactions are stored in the form of blocks. The process of adding new transactions to the immutable blockchain consists of the following three steps:

Step 1: The transaction will be broadcasted to the network.

Step 2: Nodes/ miners will compete to solve the complex mathematical puzzle to validate the transaction. 

Step 3: On validating the transaction, the miner will add the new block to the blockchain network and get the mining reward in the form of newly minted crypto.

In order to become eligible for validating the transaction & adding the new block, the miners need to do work in the form of computational power in solving a complex mathematical puzzle (Target hash). The probability of solving this complex puzzle is directly proportional to the computational power contributed by the miners. To prevent manipulation in the blockchain network, the PoW consensus mechanism requires miners to put efforts in the form of computational power.

Limitations of PoW: 

Although the proof of work consensus mechanism provides the most secure and decentralized way of securing the blockchain network, it also has a few limitations. The PoW consensus mechanism is a highly energy extensive process.

As per the Cambridge Center for Alternative Finance (CCAF), Bitcoin, which works on PoW consensus, consumes approximately 0.55% of global electricity production or equivalent to the annual energy consumption of countries like Sweden or Malaysia. The high energy consumption of PoW is one of the major limitations. 

Many politicians and environmentalists suggest replacing PoW with another consensus mechanism (Proof of Stake) as it impacts the environment negatively. 

Other significant drawbacks of PoW include the slow transaction speed and high cost of transaction fees. It also requires computers with high computational power and advanced hardware. The mining requires setting up expensive equipment. It also has high operating costs due to additional expenses of electricity and effective heat management systems to prevent overheating or damage to the system. The high cost of operating PoW has restricted lots of people from participating in the mining process, and it also gives rise to scalability issues.

Cryptocurrencies Using PoW: 

Following are a few popular cryptocurrencies that are using PoW (Proof of Work) as their consensus mechanism: 

  • Bitcoin
  • Ethereum Classic 
  • Monero
  • Litecoin
  • ZCash
  • Dogecoin
  • Bitcoin Gold 
  • Bitcoin Cash
  • Ethereum

Ethereum has been working on PoW (Proof of Work) since it was created, but the Ethereum foundation is working on switching its consensus mechanism from PoW (Proof of Work) to PoS (Proof of Stake). The transition to PoS is yet to take place. 

We hope this article will help you to understand the concept of Proof of Work (PoW) and its working mechanism. If you like our simplified explanation of PoW and would like to read more articles on crypto concepts, join our Telegram community, and don’t forget to follow our social media handles.

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