The concept of proof of work is a system by which members of a computer network work together to solve arbitrary mathematical puzzles. These individual users upload software to create ‘nodes’ that communicate with each other.
Cryptocurrencies such as Bitcoin, and later, Litecoin began using proof of work as a way of validating transactions and mining new coins.
Originally used to detect and deter malicious activity, proof of work can identify tampering in data. The mathematical puzzle used to do this is called a hash. Users put a set of data through something called a hash function creating a unique long string of numbers.
Any tiny change to this generated data alerts users to tampering. This deters malicious users from gaming the system. The ‘work’ element of the concept is the computational time and energy put into solving the puzzle. Working together, users create a decentralized consensus of trust. Transactions can be verified and malicious attacks deterred. In addition, new cryptocurrencies can be created by adding to something called a blockchain.
Mining the blockchain
A blockchain is a digital database shared on a computer network. It stores information in digital format. The database collects a limited amount of this data into blocks. Once each block is full it is closed and a new one started. A new block is ‘mined’ when a participant or ‘miner’ solves a hash. There are targets of difficulty for the solution. This is set so that mining a new block occurs within a determined timeframe. The successful miner receives cryptocurrency in reward. The effort the miners expend in solving the hash is the proof of work. Often participants work together and pool resources.
What is the Process?
- New Litecoin transactions are grouped and the data put into a ‘block’
- Miners compete to ‘solve a hash’. This is basically a complex math problem, and solving it is the proof of work
- One miner who has solved the hash is chosen to add the block to the blockchain
- The successful miner receives a reward of Litecoin
Mining Rewards
The amount of newly created Litecoin (LTC) rewarded to miners for completing a block, known as ‘the block reward’ is currently 12.5 LTC. Completed Litecoin blocks occur on average every 2 minutes and 20 seconds, meaning a creation of new Litecoin approximately every 11 seconds.
Advantage of Proof of Work
The main advantage of the proof of work protocol is security. It allows peer-to-peer transactions between anonymous entities in decentralized networks. There is no need for a central authority.
The second advantage is that it solves the double spend problem. As cryptocurrency is data, in theory it could be copied and spent over and over again. By incentivizing miners to verify transactions, this removes the possibility of double spending.
Environmental Concerns
The main criticism of the proof of work protocol is the huge amount of energy it uses. A 2018 study at the University of Cambridge stated that the energy use of Bitcoin is equal to that of Switzerland! In January 2022 the European Securities and Markets Authority called on the European Union to ban proof of work in favor of the alternative proof of stake protocol which uses 99% less energy.
Centralization
One of the concerns about the proof of work protocol is that crypto mining is becoming increasingly centralized in the hands of big tech firms. They can afford better resources such as ASICs (application specific integrated circuits) to cope with the demands of proof of work.
One of the reasons given for the creation of Litecoin as an offshoot of Bitcoin was to make it ASIC resistant. Litecoin uses a different algorithm from Bitcoin, known as Scrypt, which has much larger memory requirements. This was intended to make it much more difficult for the big tech firms to develop ASICs for Litecoin. In addition, the 2011 Tenebrix project modified Scrypt so that it could be used on CPUs and therefore return Litecoin mining to the wider community of individual miners.
However, in practice, the attempt to make Litecoin ASIC resistant failed. The tech firms simply developed new ASICs that were up and running by 2016, and resumed their domination of Litecoin mining. Individual miners and small mining pools were once again up against the toughest competition.
What is the Alternative to Proof of Work?
The main alternative to proof of work is proof of stake. In this protocol, rather than competing to win the chance to verify and record transactions on the blockchain, miners deposit a stake of their own cryptocurrency. The protocol then randomly chooses a miner in a sort of lottery amongst the stakeholders. That miner proceeds to verify and record transactions and be rewarded in more cryptocurrency. In other words, one miner does the work and the other miners on the decentralized network don’t do anything until it is their turn to be chosen. This results in a massive decrease in energy use.