The decentralized and self-regulating systems of a public Blockchain have operations spread across borders. Unlike centralized systems, Blockchains are not regulated by a single authority which controls and authorizes every transaction that is updated on the network. These transactions are verified and authenticated by miners, using consensus mechanism, who indulge in block mining activities for block rewards i.e., cryptocurrency.
A huge number of miners are involved in the verification of transactions, by solving mathematical puzzles using special mining computers. When a decentralized network operates on such a large scale, installing a system that ensures smooth working of this distributed ledger becomes mandatory.
This is where Consensus mechanisms come in the picture; they ensure that the entire network collectively approves and validates the contents of the ledger and are in consensus. There are multiple consensus mechanisms that are used by the Blockchain networks to maintain their authenticity and streamline ratification of transactions on the ledger.
Proof of Work (POW) is the first type of Consensus that existed even before the introduction of crypto assets in the industry. The idea was first introduced in a journal written by Cynthia Dwork and Moni Naor, published in 1993. It was only in 1999, that the idea was given a name ‘Proof of Work’ by Markus Jakobsson. But, how does consensus mechanism work in Blockchain?
The concept was viewed in reference with Blockchain when Satoshi Nakamoto entrusted that it had the ability to maintain the authenticity and conflict-free nature of Blockchain networks. He believed in the potential of POW to safeguard the network from distributed denial-of-service attacks (DDoS) initiated by malicious entities and also prevent them from gaining access over majority of the network.
But what does Proof of Work mean? POW consensus mechanism requires the solution of an expensive computer calculation which is known as mining. The act of mining needs to be done for the formation of a Block- an assembly of trustless transactions.
POW limits execution of actions in the network by increasing the amount of effort required for completion of any task. In order to attack a network based on POW consensus mechanism, an attacker needs to gain access to huge computational power and invest a lot of time to do the calculations. It is to say that the attack is possible, but its high costs and need for great computational powers discourage any entity to go through with it.
It is because of these advantages that huge Blockchain networks like Ethereum and Bitcoin utilize Proof of Work consensus mechanism in their systems.
Although Proof of Work consensus mechanism serves as the backbone of distributed ledger systems, it possesses challenges of its own. POW consensus mechanism’s energy consumption of one year is greater than the energy consumed annually by Denmark and Iceland. To run the complicated algorithms, miners need highly specialized computer hardware which comes with great costs.
These costs can only be met by organizing special mining pools that meet the increased costs of large amounts of power consumed.
Also, the computations are not valid anywhere else besides the generation of Blocks and the security of Network. This means all the power consumed for mining reaps limited benefits. It is because of these drawbacks that Ethereum planned to transition its consensus mechanism from Proof of Work to Proof of Stake.
The question is, can the new consensus mechanisms provide for the shortcomings of Proof of Work?