Proof of Work (POW) is the original cryptocurrency consensus mechanism. It was invented by Satoshi Nakamoto and allowed Bitcoin to become the first network ever to solve the double-spend problem.
Put another way, POW allowed Bitcoin to become the first-ever digital “file” that couldn’t be copied. A truly remarkable invention.
In this article, we’ll discuss how POW works, what it does well, what it doesn’t do so well and how this decade-old technology is being adapted for the future.
The beauty of Proof of Work lies in its simplicity. ASIC miners (specialized computers) perform complex math problems looking for the correct solution. The odds of finding that solution are as good as winning the lottery.
For instance, Bitcoin has 1,000,000 ASICs (actually more than one million but round numbers make math easier) and every ten minutes only 1 ASIC out of the 1,000,000 will find the correct solution. That will happen on average once every ten minutes and that ASIC is given the block reward. For Bitcoin, at the time of publication, that block reward is worth $85,000.
So if we assume that a large mining farm has 10,000 miners we can estimate that one of those ASICs will “win” 1 out of every 100 blocks. That equates to winning 1.5 blocks per day, or $127,500 per day in block rewards.
Given these economics, it’s easy to see how a mining operation can be profitable even if it requires twenty or thirty million dollars in startup investment. For the most part, mining is profitable so more mining operations are constantly being brought online and so network security is constantly going up.
Now, as more miners come online the requirements to compromise a network go up. A 51% attack requires a malicious actor to control 51% (or more) of all of the ASICs in a network. Basically a 51% attack is possible when a malicious actor can win a majority of the blocks which can allow them to propagate fraudulent transactions to their own benefit.
The problem with performing a double spend is that an attacker must control so much hardware. For Bitcoin that could easily be more than half a million miners equating to several billion dollars’ worth of investment. Thus we can see that,
While Bitcoin is very secure it’s a different story altogether for POW coins that don’t have large networks of ASIC miners. With a small cap coin it may be possible to attack the network with a small investment or even by renting the computing power needed.
Thus a 51% attack may make financial sense. Less secure coins that have had their POW consensus mechanisms compromised include, Ethereum Classic, Bitcoin Gold, Vertcoin and Verge.
Bitcoin is a multi-billion dollar honeypot. If it was easy to attack the network it would have been done long, long ago. It’s not. After more than a decade there has not been a single substantial hack performed against Bitcoin.
Thus we can see that POW (when implemented en masse) is extremely secure. It’s simple, effective and well-understood. The same cannot be said for other consensus mechanism like POS (Proof of Stake). It’s not that POS is bad it’s just that it has not withstood the pressure that POW networks have proven themselves under.
Also, a large Proof of Work network is extremely difficult to attack for logistical reasons. Even if an individual or organization had billions to spend on ASICs, the order for those miners would raise many red flags.
There are only several large ASIC manufacturers in the world and were a malicious actor to try and buy half a million units it’s highly unlikely that the ASIC manufacturers would (could) complete an order so large. It’s not even like the ASICs can be accumulated over the span of several years as ASICs quickly become obsolete. Thus attacking Bitcoin or any other large POW network would not be easy.
Large mining farms are a real problem for Bitcoin and other large POW cryptocurrencies. Decentralization is the golden ideal of any cryptocurrency but it’s hard to claim that you’re fully decentralized if only a handful of extremely powerful mining operations control the majority of the ASIC miners.
It wouldn’t take very many miners colluding to reach the point where they controlled 51% or more of all the ASIC miners securing Bitcoin. At that point they could take over the network.
Admittedly they would be very likely to do so as they would be destroying their livelihood and making worthless the hundreds of millions of dollars’ worth of ASIC that they collectively own. However, a concern that comes up repeatedly is that the miners may not have a choice.
Historically a majority of Bitcoin mining has happened in China (cheap energy, flexible regulations). There has always been a lingering concern then that the Chinese government could force the mining operators to collude and attack Bitcoin.
Thankfully the likelihood of this happening is decreasing by the day as mining operations are increasingly being brought online in other regions. While this a Bitcoin specific example, the same concern would apply to any POW network where a majority of the miners are located in the same state, nation, region, etc.
Finally, there is the somewhat valid critique that POW uses a significant amount of energy. This is true, however, what’s less discussed is that quite a bit of the energy for mining comes from renewable energy, especially hydro power in China that may otherwise go unused. That being said, POW mining does require electricity and that’s one of its primary downsides as compared to a consensus mechanism like POS or BFT.
Proof of Work is the consensus mechanism that’s gotten crypto to where it is today. From Bitcoin to Ethereum to Litecoin, POW keeps the largest cryptocurrencies safe.
It’s simple, reliable and secure. The question for the next decade is whether POW will remain dominant. Will other consensus mechanisms like POS and BFT replace POW? Only time will tell.
For now though Proof of Work is still securing the largest two cryptocurrencies (among many others) and it has a great record that will be tough to beat.