As a fan of cryptocurrency, you’ve probably heard the terms “Proof of Work,” “Proof of Stake,” and maybe even “Proof of Burn” before, but what do they really mean, and what is a “proof,” anyway? Without getting into too much technical detail, we will explain each concept one at a time over a series of articles, so you can have a better understanding of what they refer to the next time you see it in a potential investment. This week we start with the bread and butter of mined cryptocurrencies: Proof of Work.

What is a “Proof”?

First of all, it needs to be understood that a “proof” when applied to cryptography is just what it sounds like: a mathematical demonstration of specific ownership or knowledge of a solution. These are frequently referred to as “zero-knowledge proofs,” meaning that it is possible to convey knowledge of the answer to a solution without having to provide the answer itself. The original cryptographic proof used by bitcoin, a form of Proof of Work (PoW), uses a zero-knowledge proof to add new blocks to its blockchain.

Source: user Dake Wikipedia Commons

One of the simplest visualizations of this concept can be seen with Ali Baba’s cave, which is a circular cave with one entrance and a door that seals off the tunnel in the back of the cave. One person goes into the cave with a key to the door (locked from both sides) while the other stands outside, unaware of whether the first person chose to pursue the door from the left side of the circular tunnel or the right side. If the first person indeed possesses the key to the door, they would be able to reliably re-appear on either left or right side of the tunnel on command.

The first person is known as the Prover (“Peggy”), while the second person is known as the Verifier (“Victor”). The left side of the circular tunnel is referred to as Option A while the right side is referred to as Option B. After the Prover walks through either side of the tunnel down to the door, the Verifier calls out “A” or “B.” If the Prover has the key, they can unlock the door (if need be) to appear on the requested side. If they do not have the key, they can only appear on the requested side 50% of the time. Performing this series of events a number of times will eventually prove with mathematical near-certainty whether or not the Prover is in possession of the key.

As it applies to cryptocurrency, demonstration of cryptographic proof is a way to verify that a party is the owner of a designated set of data, whether it be a nonce required to tie an incoming block of transactions to a blockchain or a private key used to sign a transaction.

Origins of PoW

The concept of Proof of Work was developed in the 1990s and first employed by Adam Back, inventor of hashcash. The original purpose of hashcash was to prevent email spammers from being able to send tons of useless emails to people by requiring them to perform a nominal amount of computations before sending each email. This would prevent them from sending a mass flood of emails but still only take a small amount of time for a non-spammer to send a genuine email. Hashcash has since been employed for other uses pertaining to the internet.

The idea for reusable PoW systems was invented by early bitcoin adopter Hal Finney, who developed a prototype that allowed them to be transferred from application to application. This proposition gave an inherent value to them, thus giving rise to the idea that they could indeed be used as a form of “cash.” Finney described his idea as follows:

Normally POW tokens can’t be reused because that would allow them to be double-spent. But RPOW allows for a limited form of reuse: sequential reuse. This lets a POW token be used once, then exchanged for a new one, which can again be used once, then once more exchanged, etc. This approach makes POW tokens more practical for many purposes and allows the effective cost of a POW token to be raised while still allowing systems to use them effectively. – Hal Finney

Unfortunately, the idea for RPoW never really caught on in the form developed by Finney, but he did manage to significantly influence Satoshi Nakamoto’s idea of how to create inherent worth behind a piece of digital data.

PoW in Bitcoin

As mentioned earlier, bitcoin, the original cryptocurrency, uses a form of PoW to add new blocks to its blockchain, called SHA-256D. A miner adds a block by performing computations to find a correct “nonce,” which is a string of numbers that allows a new block to be tied to the blockchain. By hashing the block sent by a miner and verifying that it fits the correct pattern for the next incoming block, the Bitcoin Network can quickly prove that the miner did in fact find the nonce for a block.

Here is a simplified explanation of the process in the form of an example, from learningcryptography.com:

Say Bob wants to prove that he can do a really hard math question. Alice doesn’t know what the answer is, but she know’s that the answer, when put through a SHA-256 hash, is 73475cb40a568e8da8a045c…. Bob completes the question and hashes his answer. Alice can then look at Bob’s hash and compares it to the hash she has, and if they are identical, then she knows Bob found the right answer. Alice still does not know the answer or how Bob got that result – but she knows that Bob arrived at the right answer.

Each new block added to the bitcoin blockchain uses this system, relying on the hash from the previously-generated block. As soon as the nonce for a new block is found by a miner, it is sent through the Bitcoin Network, the previous “work” performed by competing miners is discarded, and the cycle of finding the nonce for the next block begins anew. In case you were wondering, ASICs are pieces of hardware designed specifically to mine for bitcoin or other coins that use the SHA-256 hashing algorithm; in fact they cannot perform other types of computations at all and have no other use outside this specific function.

The two biggest cryptocurrencies, BTC and ETH, both use PoW.

PoW in Other Cryptocurrencies

Proof of Work is by far the most popular “proof of” used by cryptocurrencies as the means for the generation of new coins, used by well over 50% of blockchain-based coins. Though PoW is thought to be very secure and as implemented in bitcoin has so far been unhackable or unbreakable, it is also perceived as being very wasteful in terms of energy resources. It is estimated that by the end of 2018, the Bitcoin Network will consume at least 0.5% of the world’s total energy supply. Other types of PoW, such as Useful Proof of Work, justify the power resouces consumed in mining new blocks by accomplishing tasks other than the generation of new coins. An example of this can be found in Primecoin (XPM), which awards coins to those who use their computations to derive previously undiscovered prime numbers.

A few other coins that use SHA-256 for PoW include Bitcoin Cash (BCH), Namecoin (NMC), and Factom (FCT). Below are some other coins that do not use SHA-256 but are still secured via PoW.

Ethash-based: Ethereum (ETH), Ethereum Classic (ETC), OmiseGO (OMG)

Scrypt-based: Litecoin (LTC), Dogecoin (DOGE), Bytom (BTM)

CryptoNight-based: Bytecoin (BCN), Monero (XMR), Electroneum (ETN)

Other: Dash (DASH), Zcash (ZEC), Bitshares (BTS)

Be sure to tune in next week as we go over exactly what Proof of Stake (PoS) entails, if you’ve ever wondered. Any questions about PoW? Be sure to leave them as a comment and we’ll be more than happy to answer them for you.