Cryptocurrency blockchain technology: What is proof of work (PoW)?

When Bitcoin launched in 2009, the “consensus mechanism”, how the blockchain processes and verifies new transactions, was based on what is called “proof of work”. Since its inception, many other blockchains have emerged, some taking a different approach to finding consensus called “proof of stake”.

Bitcoin remains the top dog as the world’s largest cryptocurrency, but the second and most widely used, Ethereum, has finally dropped proof of work. After much delay, and a significant amount of testing, the Ethereum blockchain implemented “The Merge” and now uses Proof of Stake. So what is the difference between the two consensus mechanisms? Is one better than the other?

Proof of work blockchain technology

The advantage of blockchain technology, both for proof of work and proof of stake, is that it uses a common and immutable ledger that is verified by a number of data nodes making it decentralized. This creates improved security, greater transparency and immediate traceability according to its advocates.

In a proof of work blockchain, the computer nodes compete with each other to be first past the mark in solving complex mathematical puzzles to add a new block to the chain, and with it all the rewards.

In the case of Bitcoin ‘miners’, those who run powerful computers to solve the puzzles, 6.25 Bitcoin for each block they mine. This amount will be halved sometime in 2024 and will continue to do so until the maximum supply of 21 million is exhausted, approximately in 2140. After that, miners will receive fees from the transactions to maintain the network.

However, this competition between nodes means that proof of work requires huge amounts of energy to run these number-crunching computers. In the case of Bitcoin, consumption was slightly less than Argentina’s. This has only been a strike against blockchain technology and cryptoassets creating resistance to wider adoption of the technology.

Proof of blockchain technology

One of the selling points for adapting Proof of Stake through ‘The Merge’ is that the switch will reduce energy consumption by 99.95 percent. According to Digiconomist, a site that tracks crypto’s energy consumption, Ethereum uses far less energy than before “The Merge”, but a single transaction still has a carbon footprint equivalent to 10,794 VISA transactions or watching Youtube for 812 hours.

Proof of Stake removes the need for the massive calculations to add new blocks to the chain. Instead, those who have a stake in the network may participate in the validation mechanism. Validators place a minimum stake of 32 Ether, the digital coin of the Ethereum blockchain, but the larger the stake, the greater the chance of being selected to check that new blocks propagated across the network are valid and thus the monetary reward that comes with it . But this will not necessarily block small participants as investors can commit stakes to a stake pool operated by exchanges.

Which is better, proof of work or proof of effort?

If your only concern is saving energy, the proof of stake is clearly head and shoulders above, but each has its own uses and does not solve the problems that have plagued cryptocurrencies and assets. Crypto has also entered the crosshairs of government regulators due to its use for malicious purposes, scams and hacks that have resulted in people losing over $1 billion since the start of 2021, as well as their very volatile nature.

Proof of work is much slower than proof of effort. For example, Ethereum expects to perform up to 100,000 transactions per second after the transition in addition to the launch of its shard chains. That’s up from just 30 transactions per second on its proof-of-work blockchain. But, proof of work is considered more secure and able to maintain a decentralized network.

Ethereum counters that proof of stake should make its blockchain safer by increasing the cost to a potential perpetrator of an attack by 51 percent. This is when miners with majority network control can stop recording new blocks. Likewise, the community can restore the honest chain collectively should an attack overcome the cryptoeconomic defenses.

Still, there is the concern that Ethereum’s exchange may reduce its decentralized nature and transfer more power to large firms. It raises again the specter that it would be easier for governments to pressure an enforcement service to comply with an order to censor certain transactions. Brian Armstrong, CEO of Coinbase, the largest American exchange that accounts for 14 percent of all staked Ether, has said that he would rather shut down the company’s strike service than comply with such a hypothetical order.