February 15, 2021 · 4 min read
Bitcoin and proof of work consensus
In 2008, Satoshi Nakamoto penned the revolutionary white paper, “Bitcoin: A peer-to-peer electronic cash system”. Nakamoto envisioned a future where individuals took part in a decentralized system of verifying transactions, which meant there was no single point of failure. But if there’s no central authority, how do we know people have the money they say they do? How can we be sure? Well, these networks rely on consensus mechanisms, and for Bitcoin, this is called proof of work.
Proof of Work describes how Bitcoin and many other cryptocurrencies confirm that transactions on the network are valid. Proof of work is one of many consensus mechanisms that allow these currencies to work without the presence of a central governing body, such as a bank or government. This is also known as a trustless ecosystem. A network of decentralized validators competes to solve complex cryptographic puzzles, which require computational power.
A process that requires computers to expend computational work to complete a task. In the case of a proof of work blockchain, this means proving you worked, by solving a complex mathematical problem.
That’s great, but how is this different from a bank? Well, through cryptography, we can create what is known as a trustless ecosystem. A trustless ecosystem doesn’t inherently sound safe, but it’s exactly the opposite. Trustless systems require no trust to operate. When you hear that a blockchain is ‘trustless’, what it means is that everyone can reach consensus on what the objective truth is. For example, a bank would be considered the opposite of a ‘trusted third party’. Trust is required on the part of the consumer, that the bank has your money, and is taking the necessary actions to secure it, transfer it, and verify it.
The proof of stake versus proof of work argument isn’t going anywhere. Below are some of the issues people have raised with Bitcoin, and specifically, proof of work consensus:
Due to the nature of proof of work and mining, they’re much more susceptible to centralization due to the effect of technological scaling. More simply put, this is due to the relationship between investment and reward. In Proof of Stake, they are directly proportional. In Proof of Work, however, large scale farms actually become more efficient for every dollar spent, meaning the more you spend, the more efficient you are, therefore the more control you have. In recent years, we have seen large scale mining farms established in areas of cheap energy. People have estimated that some of the larger mining farms could have anywhere from 10% to 15% of the global mining power.
Investment to reward ratio of consensus mechanisms
Many people bring up power usage when it comes to Bitcoin. It’s true, Proof of Work Coins expend a large amount of energy globally. However, this criticism is disingenuous because it fails to account for how much energy our current financial systems use in comparison. However, Proof of Stake uses far less than both and can be considered a more efficient mechanism.
The skill level required to mine cryptocurrency is high. You must have familiarity with computers and some level of programming. With Divi’s one-click staking and masternodes, securing the network in a decentralized way couldn’t be simpler. This has ramifications when it comes to the decentralization of a currency. We must have validators all over the world helping secure the network, not just those who are technologically savvy.
A 51% attack can occur when any one person gains access to 51% of the processing power of the network in the case of Proof of Work, or 51% of the coins in Proof of stake. It means that they can reach consensus without anyone else, and have the ability to work in harmful ways. Bitcoin has drawn criticism due to its high levels of centralization. Mining pools have aggregated the processing power to such a degree, that a 51% attack on Bitcoin is not out of the question.
Below is a list of some popular coins that use proof of work to reach consensus if you’re interested in continuing your research!
Litecoin: Originated as a fork of Bitcoin, LiteCoin uses a straight proof of work consensus mechanism.
Monero: Receives plenty of attention due to its strong commitment to transaction privacy.
Although Proof of Work attracts some valid criticisms, Bitcoin remains the gold standard of cryptocurrencies, largely due to it being the first. The Divi project recognizes that the cryptocurrency revolution will consist of many different currencies, using different consensus mechanisms, all with different strengths. All cryptocurrencies owe Bitcoin a debt of gratitude because, without it, we wouldn’t have blockchain. As the technology improves, we’re seeing more secure and efficient ways of reaching consensus.
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February 15, 2021 · 4 min read