Decentralization is one of the core principles of cryptocurrency. For the decentralization of cryptocurrency to be successful, there has to be a way to confirm the transactions without the help of any financial gatekeepers, institutions, or governments. Proof of work (PoW) is one such solution.
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What Is Proof of Work?
One of today’s most common quality assurance features for cryptocurrency is proof of work. This consensus mechanism allows blockchain network nodes to agree on the state of all information and data recorded on the network. Several cryptocurrencies—including Bitcoin, Dogecoin, Litecoin, and Monero—use proof of work as the consensus mechanism for their transactions.
How Does It Work?
Proof of work allows members of the network to validate incoming digital transactions and add them as new blocks on the blockchain. The network members, called miners, need to compete against each other to validate the transactions. Each miner has to use computation resources to solve arbitrary mathematical puzzles. The winner of the puzzle gets to add the latest transaction to the blockchain.
Every cryptocurrency, including Bitcoin, has a blockchain that contains a public ledger. This ledger includes blocks of transactions, with each block having a specific hash.
A miner has to generate a target hash using mining devices. The first miner who achieves the target hash adds the incoming transactions to the blockchain and earns a reward in the form of coins and transaction fees. The entire process of proof of work is difficult and requires certain resources to prevent the manipulation of transactions.
Advantages of Proof of Work
There are several advantages to using proof of work, including the high level of security it offers and ease of implementation. Compared to other validation mechanisms such as proof of stake, the proof of work is significantly easier to use. Proof of work has been used by Bitcoin and other popular cryptocurrencies for years, making it a tried and tested mechanism for validating transactions.
Disadvantages of Proof of Work
When proof of work was initially used for Bitcoin in 2009, only a regular desktop computer was needed. But by 2021, proof of work would need a powerful computer and a large amount of electricity to mine just one Bitcoin. The energy consumption involved in the process has made it less attractive to many users who are conscious of the environmental impact of heavy electricity usage.
Secondly, the demand for larger electricity consumption has reduced proof of work’s availability to certain major regions of the world where electricity is cheaper. These global limitations go against the decentralization fundamentals of cryptocurrency.
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