Proof of work is one of the methods that cryptocurrency uses to verify transactions. It is also called POW for short, and it can be used by cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH). The aim of proof of work is to act as a guard against cyber-attacks whilst still allowing an efficient network.
POW entails solving mathematical puzzles. For cryptocurrencies like Bitcoin, the main objective of POW is to validate transactions that happen over their blockchain network. POW requires an immense amount of computing power to be solved every time a transaction happens on the network. The more powerful your computer is, the easier it will be for you to solve these mathematical puzzles and get rewarded with cryptocurrency tokens in return.
Some people think this defeats the whole purpose of decentralization which forms one of the main principles behind cryptocurrencies. Critics also say that proof of work actually has nothing to do with ownership because anyone can get rewards without actually owning any cryptocurrency at all!
Mining pools are prime examples where users pool together their computational resources so they can mine faster and get more rewards in return – without actually owning any cryptocurrency.
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How does proof of work validate transactions?
PoW is able to validate transactions with block generation. By solving complex puzzles with computational power, new blocks are generated which store Bitcoin transactions. Bitcoin users then pay transaction fees to bid for space in the new block, whilst the miners confirm transactions using mining power. Extra Bitcoin rewards are then paid through the block rewards.
Can you double spend with proof of work?
Double spending is only possible before a block is confirmed. Once the Bitcoin blockchain and miners have determined that your transaction is confirmed, then you won’t be able to spend twice.
Why is proof of work required for Bitcoin?
Proof of work is what keeps the network secure against hackers. When other miners join the network, it increases the security. Its very easy to start mining and any modern computer can join the network easily. POW is what keeps Bitcoin without a central authority. It also is a perfect loop that incentivizes more miners to receive rewards, so more join and the cycle continues. The winning miner will receive payment of the block reward, which is usually a pool and split between many. POW is also extremely stable and has been in use more than a decade, producing valid blocks.
What are the downsides to proof of work?
The downside of PoW is the energy use and expensive hardware required. The large amount of energy consumption is very bad for the environment, especially if its fueled by fossil fuels. Cryptocurrency mining will always require more power over time, because hardware is getting better, so to best protect the network you require a significant amount of hashrate. As the next block gets more difficult than the previous block, engineers and computer specialists are looking for new hardware that can greatly improve mining efficiency.
Other digital assets such as Ethereum are looking to use proof of stake, but the Bitcoin network is choosing to stay with PoW. It also has limits, the transactional volume that can pass through the Bitcoin network is very limited. This is why Bitcoin is seen more as a store of value compared to digital money. Even with more computing resources, it wouldn’t be able to handle more network participants, if everyone is transacting regularly.
