The technical aspect of the crypto world is following us everywhere: in news, articles, influencers’ channels, and anything else related to Crypto. We want to learn more about the Blockchain industry. In that case, we need to focus on understanding how the consensus mechanisms (like Proof of Work) underlie the network’s security work and which, through mining or validation, add new blocks to the network and emit new cryptocurrencies.
The reason consensus mechanisms are in the public eye is that they define the processing times for transactions and the associated costs of the process.
Why is it essential to understand consensus mechanisms in crypto?
Centralized systems where the database exists on a single source have always been easy to manage in terms of security and technology because the information exists in a single cyberspace and can or cannot be shared with people – for example, a cloud that we share with our colleagues at work. In contrast, decentralized systems in crypto are networks distributed on multiple sources in space. Thus it is necessary to sort the information and increase the security of the data we share among the participants in the chain. These consensus mechanisms, therefore, work with processing information from different blocks simultaneously.
What exactly is Proof of Work?
Proof of Work is the most well-known consensus mechanism on the market due to its representative network and cryptocurrency: Bitcoin. However, it is a mechanism that had existed for some time before crypto, since 1993, when Cynthia Dwork (a computer scientist at Harvard) was trying to figure out how to discourage attacks, spam, or other abuses that can take place in a system.
On the Blockchain, PoW or proof of work is how miners solve computational problems to issue coins and add blocks to the chain. This requires costly hardware equipment and high electricity consumption to discourage any third party with nefarious intentions from participating in the system.
How does PoW work?
Miners compete with each other and depending on the computational power or cyber effort produced, transactions with Bitcoin or other coins on Blockchains with a similar mechanism go through a security check, and PoW creates a hash for the block of data.
These calculations vary depending on how much traffic there is on mining because their difficulty must be high but possible. For example, the more miners there are, or the more computational power increases, the more complex the mathematical equations that need to be solved will be, but still possible to verify – also known as the CPU cost function. For the work done, miners are rewarded with percentages of the coins added to the network through the incentive structures present in the PoW mechanism.
Understanding the Pros and Cons of Proof of Work
Proof of Work is a widely used consensus mechanism in the crypto world, thanks to the popularity of the Bitcoin network. However, it is a mechanism that existed for some time before the advent of crypto, dating back to 1993 when computer scientist Cynthia Dwork at Harvard tried to find ways to discourage attacks, spam, or other abuses in systems. In the blockchain, PoW is how miners solve computational problems to mint coins and add blocks to the chain. This requires costly hardware equipment and high energy consumption to discourage any third party with malicious intentions from participating in the system.
While PoW provides a high level of security for the network by requiring a lot of effort to mine coins and validate transactions, the process can be time-consuming and expensive. Additionally, the considerable energy consumption necessary for PoW makes it a very polluting mechanism, which many have criticized as inefficient. Besides the pollution, there are also geopolitical and financial risks. For example, if the country where most of the miners are located suffers from a change that would throw it into a resource crisis, the BTC price could suffer, and the entire crypto market could suffer.
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