Intro

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What is Proof-of-Work

Proof-of-work (PoW) is a consensus algorithm for blockchain networks that is the underlying consensus model of Bitcoin. Bitcoin is the cryptocurrency that pioneered the use of PoW. 

At a high level, PoW relies on the conversion of electrical energy into digital blockchain “weight,” affording unforgeable costliness to PoW blockchains like Bitcoin, and in the process, driving an incentive structure that produces a byzantine fault-tolerant (BFT) distributed network. 

Bitcoin’s Nakamoto Consensus

It is best to understand the mechanics of PoW through the prism of Bitcoin’s Nakamoto Consensus, which is the unabated cardinal example of a successful and sustainable PoW implementation. 

PoW relies on a mathematical puzzle to solve for a value below a specific threshold (nonce) that produces the next block broadcast to the network. Block leaders, which produce the next block, are selected in a lottery-like format that corresponds directly to their contributed computing (i.e., hash) power to the process. As Satoshi Nakamoto explained in the Bitcoin whitepaper: 


“The proof-of-work also solves the problem of determining representation in majority decision making. If the majority were based on one-IP-address-one-vote, it could be subverted by anyone able to allocate many IPs. Proof-of-work is essentially one-CPU-one-vote. The majority decision is represented by the longest chain, which has the greatest proof-of-work effort invested in it. If a majority of CPU power is controlled by honest nodes, the honest chain will grow the fastest and outpace any competing chains.”Satoshi Nakamoto’s whitepaper

The longest chain has the most work, meaning the most power (i.e., hashes) contributed to it, making it trivial to identify. 

There are two primary participants in the PoW consensus model: miners and full node operators. 

Miners

Miners are a market of participants who compete to solve to produce the next block and broadcast it to the network, which is produced every 10 minutes. The winning miner per each 10 minute round is rewarded both the block reward (currently 12.5 BTC) and the transaction fees in the block. This drives an incentive system for miners to remain honest in their propagation of blocks for two primary reasons.

miners

First, miners have sunk costs into expensive hardware equipment that solves Bitcoin’s mining algorithm through attempting to brute force the solution in continual computation, at the expense of electrical energy. 

Should miners act maliciously and attempt to subvert the mining process, hurting Bitcoin’s credibility in the process, their investment in hardware would become more costly since the ROI in BTC awarded from the block reward would be worth less than before, which leads into the second reason. 

Miners earn their block rewards directly in BTC, not cash. Consequently, they are converting a real-world resource (electricity) into the production of BTC, fostering the type of unforgeable costliness that underscores Bitcoin’s entire security model. Additionally, the blockchain is granted a form of real-world value since miners are willing to convert not just a fiat currency (in the form of hardware) but an actual resource into the production of BTC.

The issuance and monetary policy of Bitcoin are subsequently tethered to the mining process, making them nearly impossible to change as the network’s hash power grows to the proportions it exists today. Bitcoins are elegantly distributed from miners to the market at Bitcoin’s spot price since miners need to sell some of their holdings to earn a profit and pay bills. 

Full node operators

The second entity in PoW is the full node operators or everyday users that run full nodes. Full nodes are software clients running the Bitcoin software that automatically validate and propagate transactions and blocks in the network.

Using cryptographic proofs and Bitcoin’s consensus rules, full node operators are the heartbeat of the network and the ultimate validators of the network’s state. Full node clients can also be mining clients, and clients reject invalid blocks and transactions on the network. 

PoW has been criticized for its energy-intensive design and low-performance capacity for on-chain transaction execution, but with some caveats. For example, the vast majority of Bitcoin’s mining is produced with renewable energy, and balancing the costs of energy expenditure with Bitcoin’s overall value and wealth generation is a convoluted task. Regardless, PoW is a significant innovation in computational and game theory design. 

Bitcoin’s PoW model is a security measure that is a confluence of game theory incentives, distributed computing, social consensus, market economics, and cryptographic proofs. It is the innovation that empowers a blockchain to function with secure, sustainable, distributed consensus and Bitcoin’s more than decade-long existence is profound proof of that. 

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