This is the consensus mechanism which is used by miners on the Bitcoin blockchain and, to date, still one of the most popular systems as it is the most secure. Miners working on a POW blockchain have to confirm blocks by expending computing power, either through a CPU, a GPU, or an ASIC (Application Specific Integrated Circuit), listed in order of efficiency. Such computing power is used to solve a complex algorithm, known as hashing, in order to find the correct answer and in doing so confirm all the transactions that have taken place and grouped in that particular block for which computing power is being expended. Superficially put, think of hashing as a race towards solving a difficult mathematical formula so as to unlock the block reward.
Whoever solves the algorithm broadcasts the solution across the network, with other miners checking such solution as verifying it as correct. When the majority of the network acknowledges it as correct, that same block is included in the latest chain and all the miners in the network will eventually move onto the latest chain.
POW is the most secure as in order to consistently mine the latest block, one would need to consistently have more hashing power than the majority of the network, which on large powerful blockchain networks such as Bitcoin’s is extremely difficult unless a concerted group effort is conceived. In order to change earlier blocks, one would have to go even further and rework the solution to such earlier blocks; think of it as having to expend such enormous computing power multiplied by the number of subsequent blocks to the one being attacked, as all the subsequent ones would need to be changed in order to modify the one block being targeted. It is for this reasons that after a certain amount of subsequent blocks, one can safely say that such block has now become immutable.
Bitcoin’s Mining and pow in practice
If one were to superficially depict how, in practice, a Bitcoin block is mined and validated, then the process takes place in the following manner:
- A miner by the (inconspicuous) name of Rihanna sets her computer system to try and solve the algorithm and unlock the block reward whilst competing against several other miners. Let’s imagine that this is Block 10.
- While the miners are racing against each other to solve the algorithm, thousands of people are sending and receiving Bitcoins. These are all transactions which have to be included in Block 10 (and, if no transaction fee is paid or there isn’t enough space in the current block, they will be included in the following one).
- Rihanna’s computer has finally found the correct answer to the algorithm, which correct answer is known as Proof of Work . However, the majority of the network (51%) needs to validate her answer and acknowledge it as the correct one.
- The answer is transmitted across the network, and miners start acknowledging her answer as correct. As they are validating her answer, they are downloading her Block 10 (including all transactions which have taken place in Block 10) together with the correct answer onto their own computer to serve as a base for the upcoming block 11.
- 51% of the network have finally given the nod for Rihanna’s answer, and eventually all the network downloads Block 10 and moves onto Block 11. Rihanna receives her block reward (50 BTC as it initially was) along with all the transaction fees paid during the time period taken for the block to be solved.
- The race to solve the answer to Block 11 starts and the whole process above is repeated.
POS miners do not need to spend large amounts of money to buy mining equipment, because no such equipment is needed; any device connected to the Internet will do. This is because in POS mining, all a miner needs to do is prove that he/she has a stake in the blockchain network. That same stake can range from a piece of data entered into the ledger to an amount of cryptographic tokens of a certain monetary value. Any miner with a stake in the network may be chosen at random to solve the newest block, with the “random ticket” having been drawn in advance to add more to the element of randomness and unpredictability involved in choosing the miner for a block.
Miners with an “older” stake have an increasingly higher chance of getting chosen so as to have as fresh a pool of miners as possible; once a miner has been chosen to mine a block, his stake is reset, making it similar to redeeming a prize after waiting in the queue and going back to the end of the queue to await your turn again.
Since no computing power is needed in POS consensus systems, there were fears that miners would not have any disincentive to attack the network as it would not cost them anything. However, modern POS blockchains destroy the stake of those miners who try and launch a malicious attack on the network, and safeguards are put in place to make it extremely difficult to change older blocks so as to achieve as close a safety level as possible similar to POW blockchains.
Ethereum, the second largest cryptocurrency after Bitcoin, aims to move to POS towards the end of 2017 or beginning of 2018, as POS is vastly more efficient and faster than POW.
POB works similarly to POS, except rather than just holding a stake, miners would actually need to “destroy” their stake and earn the right to mine blocks. The larger the stake destroyed/burned, the better the chance of being chosen to confirm blocks. This solves the problem of errant miners since miners who burn their stake would be acting against their best interests if they were to launch a malicious attack on the network as their burned stake would go to waste.
The main caveat of POB systems is that the first “burners” in the network can gain an inordinate amount of power if the value of the blockchain increases over time, as their stake would cost less than that of latecomers who would need to spend a larger amount to get the same or similar amount of mining power as the early burners.