Most commonly found in 1st generation blockchain technology like Bitcoin and Litecoin.
PoW is a type of Consensus Mechanism
What is a Consensus Mechanism?
As detailed in our post of DLT (click here), consensus is when majority of network participants agree on a transaction or decision. When majority decision has been achieved, a consensus has been reached.
A Consensus Mechanism is the method/system used to reach that agreement as there are several different ways to reach it.
Bitcoin is most popularly known for using Proof of Work so we will explain it in relation to that.
How it works
In the Bitcoin network, there are miners which use large amounts of computing power to solve complex equations, once solved they have the chance to earn bitcoins as a reward. The miners have to PROVE that they did the work to other network participants for their work to be verified and thus receive their reward (Bitcoin). Once the miners have proved that they performed the work and a consensus is reached, they receive their reward of a bitcoin. Once they receive their bitcoin, this ‘transaction’ gets added to the blockchain (more on that here).
This is a simplified version of the consensus mechanism as it goes into much more detail, however for the average person, it would only succeed in confusion. Furthermore, the extra detail isn’t particularly necessary to know if you just want to invest as opposed to becoming a developer.
Advantage of PoW
A huge advantage of PoW with Bitcoin is due to the size of the network (millions), it is extremely difficult to take hack the network as you would need the consensus of millions of network participants.
Disadvantage of PoW
The main disadvantage is that due to the increasing difficulty of solving those complex equation, more computing power is constantly needed. Here’s some data from 2017’s power usage of the bitcoin Mining network i.e how much electricity it costs to mine bitcoin at that time.
“…bitcoin mining uses an exorbitant amount of power: somewhere between an estimated 30 terrawatt hours alone in 2017 alone. That’s as much electricity as it takes to power the entire nation of Ireland in one year” (source).
Additionally proof of work is not scalable so when a transaction is confirmed on the blockchain, it can take around 10 minutes during periods of low usage but that can rocket during periods of high usage. Compare that to a Crypto like XRP which does the same thing in 5 seconds, so you can see the difference in speed. What this means is that PoW is immensely slower hence why no Cryptocurrency uses PoW anymore.
As we mentioned earlier there are several types of consensus mechanism, next up we will be covering another popular one called Proof of Stake which is popularly used by Ethereum (2nd Largest Crypto) and many others.
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