What is Proof of Work (POW)
You have heard of bitcoin, right? You know the cryptocurrency that has gained enormous value and is still rising. 1 bitcoin is currently valued at over 30,000 US Dollars today. That is a lot! If you are one of the first few to use your computational power in this field to mine bitcoins, the chances are you have become Richie rich! So, can you just hop in and make bitcoins of your own?
Firstly, no, it isn't that simple. Bitcoin is a cryptocurrency that uses the "proof of work (pow)" consensus method. Cryptocurrency itself is based on blockchain technology, which is one of the most secured algorithms there is. So, what is proof of work (POW), cryptocurrency, or blockchain? How do they work?
Blockchain Technology Explained
Before you delve into the magical world of bitcoin and start dreaming of becoming rich, you need to understand the mother technology, blockchain. The most common way to describe blockchain is that it is a digital ledger that holds all the information in the form of permanent blocks that are shared among the users through a P2P connection. Even though the idea of blockchain can be dated back to 1982 and 1991, the system effectively came into being in 2008 through the works of Satoshi Nakamoto as he introduced bitcoin to the world.
What is a P2P Connection?
Have you ever used torrents? Well, do not answer that as it has been illegal in many areas now, and it might even land you in jail. Have you seen the satirical comedy tech drama show Silicon Valley which ran from 2014 to 2019? Suppose you did, and understand some of the concepts. In that case, you know that the new internet's vision given by the Pied Piper company about the new internet, which will be decentralized and out of anyone's control, data collection, or anything, is implementing the P2P architecture.
Here, instead of using a single computer as the server, the resources are divided among all the users, making it harder to hack or collect information from any user. Also, due to the network being dependent solely on the individual's computer or mobile, no government or agency can regulate or put in a firewall amongst it. The Internet will be truly free in every sense.
Some similar low-involving technology is already out there—for example, the FireChat uses Bluetooth to establish a P2P connection among the users. Torrent and our topic in question today, blockchain technology is based upon the P2P technology.
After and Before Blockchain
Even before the introduction of blockchain technology by Satoshi Nakamoto in 2008, digital currency existed on a small scale. However, back then, it was susceptible to hacks and misuse to a great extent due to the double-spending problem.
You see, in real life, the currencies are issued by the central bank or the government and have a unique code on them, and every transaction is in real-time. However, you can't ensure real-time transactions among all the connected P2P computers, as there is always a lag in connection. So, 2 or more computers can send the same token more than once, and the recipient computers might not receive the transaction simultaneously. One computer may receive the request of the 2nd computer before while the other might get it first from the 1st computer. In this way, there is no way to balance the books, and it will be complete mayhem!
We will talk about how blockchain technology solved it, but first, talk about how internet banking works.
Does Internet Banking use Blockchain Technology?
Even though blockchain technology has gained massive momentum among the fintech companies, over 13.5% of financial services companies somehow adopt it. The chances are that your local bank isn't using the tech for online transactions just yet. Instead, they use centralized currencies to conduct online transactions. That is, there is always a trusted third party that verifies the token of the transaction.
As you see, you have to go through a gateway, put in your bank or card details, OTP, to conduct online transactions. Since the gateway is just one party, the chances of double spending are low, that is, without hacking the gateway itself! (pun intended)
Blockchain and Consensus
The whole idea of blockchain was to be independent and free from any authority. So, a trusted source doesn't go too well with this, and everything is decentralized, the process won't work. Satoshi Nakamoto solved this problem by using a hashcash-like method to timestamp each block. What is a block? Each request or transaction sent to the network is a block. The block contains the token of the transaction, and of course, is time-stamped through encryption.
Now, the blockchain won't just add any block to the chain. A block can only get its place within the network through consensus between the participants. All the participants agree that a specific transaction is the one to be added next to the block. There are multiple consensus methods like proof of stake, proof of space, proof of authority, proof of work, proof of stake, directed acyclic graph, etc. Bitcoin, i.e., Nakamoto, introduced consensus through proof of work, so it is still arguably the most popular method.
So What is Proof of Work (POW)?
Now the consensus method's idea is that the miner will have to work hard to find the solution or the code to enter a valid block. If it is too easy, then everyone can solve it, and the double-spending problem persists. So, a dynamic difficulty is set for all the puzzles according to the computational power involved. The miners will have to find the right random number known as a nonce. A lot of trial and error is required to find the correct number, and once you do, hash it and send it to the blockchain.
Now, in proof of work (pow), even though it is challenging to find the right nonce, it is easier to validate whether the number is correct. So, all the other connected users will reach a consensus quickly and add your transaction to the block. In bitcoin, doing such works to validate a formula will earn you a bonus and transaction fee.
Even though the article is titled "What is proof of work (POW)," we had to explain all the prior terms to understand the basics of how the system works. Even though the idea is simple, the mechanisms are very complex. It is still considered a sophisticated technology. With time, however, the adoption rate and the technology cost will go down, making it accessible for everyone.