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Consensus Algorithm Proof of Work

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  • Consensus Algorithm Proof of Work

    PoW (Proof-of-Work)

    Proof-of-Work algorithm is the most popular consensus mechanism used on the blockchain, not least because it is employed on the Bitcoin and Ethereum platforms. The bottom line on the algorithm is that the network node must perform computationally intensive operations in order to prove a transaction and add it to the pool, with the output being easily comparable with other results of network computing. The first node to complete all necessary computations is rewarded for completed work, the system members therefore compete. It should be further emphasized that the scope of so-completed work is always an expected measure.

    Pros of PoW:

    ● Resistance to a Sybil attack where the user maliciously creates fake nodes in order to suppress real honest users. However, the probability of fake creation is equal to zero since computational performance underlies Proof-of-Work and is linked to the material world.

    ● Proof cannot be falsified or stolen due to the above reason.

    ● Proof cannot be gained in advance since the emergence of every new block requires the launch of a new computing round (every new block contains a link to the previous one).

    ● Honesty in award allocation. The amount of award directly depends on the miner’s hash rate (computational performance). The miner is always awarded pro rata to the mined blocks.

    ● Motivation for fair play. Since mining costs are material and relatively high and unfair behaviors deprive the member of profits, miners are given an additional stimulus to abandon their malicious practices.

    The system is fairly clear and easy to understand. It still has some major drawbacks.

    Cons of PoW:

    ● Enormous energy costs. The system is engineered to ensure ever-growing task complexity and thus computing requires more and more energy and computational performance, which are further wasted — the only transaction added to the block is that from the first node to complete computing.

    ● Vulnerability to a 51% attack. Entities which have access to more powerful computing systems are in a position to mine more, thus potentially posing a centralization threat. Even now, 65% of the Bitcoin hash rate are shared by five pools. This is a potentially dangerous situation: their joined forces (if any) can cause a 51% attack to be launched, giving rise to a malicious majority that is able to ignore blocks from all remaining miners. Experts assure that bigger systems are protected from this kind of situations, whereas smaller blockchains with far lower numbers of network members still face some risks.

    ● Possibility of creating forks. An updated transaction log is defined as the chain of blocks with the greatest aggregate complexity of work proofs. Accordingly, members search for a new block above the existing ones. However, the possibility of creating forks cannot be ruled out as computations run in parallel, although their intended creation is uneconomic in the current environment.

    ● Computing takes a long time. This results in a significantly slower transaction process, thus rendering systems with such consensus mechanism unsuitable for micropayments or rapid money transfers.