I have been bullish on Bitcoin since I discovered it, but the moment I became a real super bull was when I learned about Proof of Work. Proof of Work the fundament of the security system that is never hacked to date while there is a bounty of billions of dollars for the one that is able to successfully break it. I believe so much in the PoW mechanism that I believe that it will never be broken. This is HUGE in a time that everything is shifting to the internet and fraud is more common then ever. In this article I will describe the importance of Proof of Work as a serie of articles why to learn about / invest in Bitcoin first before looking to altcoins:
https://steemit.com/bitcoin/@michiel/want-to-invest-in-cryptocurrencies-start-with-bitcoin
The Bitcoin network is secured by Proof of Work (PoW)
What is Proof of Work?
Proof of Work is a method to authorize transactions in a secure and decentralized way. Because PoW allows this process to happen in a decentralized way, no 3rd party is involved. This creates a real peer to peer network to transfer value. This really is a big deal (will be explained later).
PoW existed already before Bitcoin, but Satoshi used it in another way and brought it to another level. PoW was originally used to avoid spam by requiring the sender of an e-mail to wait a few seconds between every mail to be send. A normal user would not really care or remark that he has to wait a few seconds, but a spammer would need to put a lot of effort in to send thousands of e-mails.
How is PoW used in Bitcoin?
Proof of Work in Bitcoin requires work to make a chance to be the one to authorize the next block of transactions in the Bitcoin blockchain and get paid the block reward (12.5 BTC) and all the transaction fees of that block. The required work is delivered in the form of real world resources like specialized hardware and electricity by miners.
All the transactions in a block are encrypted through SHA 256 what results in a line of characters. A part of these characters are replaced by a zero. The miners compete with each other by guessing what set of characters these zero’s represent. There is no other way to figure this out than by guessing. The computing power used by the miners is measured in ‘hash per second’ what actually means guesses per second. To do these guesses special hardware and electricity is used.
The miners with the most hashes per second will burn the most electricity, but will also have the biggest chance to find a block and get rewarded. When a miners finds a block he will propagate this information over the network and when the majority agrees the new block will be created and the miner will include a transaction with the reward to his own address in this block.
The idea is that miners are burning real valuable resources to create the chance to win the mining reward. When the expenses are already made the miner don’t want to risk his reward by lying about the outcome, after propagation of the new block all the other miners will check the outcome (can be done in milli seconds) and will kick him out of the network when it is not correct. This creates the incentive to play with the rules of the network. As long as more than 50% of the miners play by the rules the truth will always be written in the blockchain.
Miners use specialized hardware to deliver 'work'
PoW is regulated by free market forces
The more zero’s in the line of characters the harder to find a block, so the more time it will take with the same hash power. How much hash power is needed to find a block is called the difficulty and this will be adjusted every 2016 blocks. When the price of Bitcoin goes up the reward will get higher and more miners will be attracted to join the network and blocks will be found more often.
After 2016 blocks the network will adjust by adding more zero’s till the blocks are found every ten minutes again. This means that a higher price leads to higher difficulty and more security and reverse. This is a perfect automated system that will increase the security when the value goes up and decrease the security when the value goes down. Because of this mechanism it will be always more rewarding to spend your hash power by mining than by cracking the network!
PoW is decentralized
Yesterday I wrote THIS article about the power of decentralization. Mining is also decentralized and because every miner want to earn as much as possible playing by the rules of the network is their only option. Another strength of decentralized mining is that it is impossible to destroy or successfully attack it.
An attacker needs to destroy ALL the miners of the world to be really successful. Mining takes place in huge factories all over the world but also on small scale in houses, garages and other places. Soon miners can be even build in all devices to create value from unused resources. To destroy all mining in the world would be as hard as destroying all marihuana in the world…….
This is impossible. There will always be countries that allow and protect it and even if not, people will always do it on hidden places. As with marihuana, the harder governments make it, the more rewarding it will be for the ones doing it. I LOVE FREE MARKET, AUTOMATIC REGULATION EVERYWHERE!!
What does PoW deliver to the Bitcoin network?
Proof of work makes it possible to exclude a trusted 3rd party for the authorization of transactions. The exclusion of a 3rd party means more efficiency and less costs. More importantly it eliminates human error, fraud and control. This all while creating a security level that is never seen before!
Bitcoin is by far the most robuust and proven PoW blockchain and thus by far the most secure. I think security is a critical fundamental feature that all applications on a blockchain MUST have. This means that Bitcoin will do everything what it does better than any other blockchain because it is always most secure. Again, this is a must on the internet of TRUST and VALUE. Another blockchain can maybe do more fancy things, but what is it worth when the value or trust generated by this blockchain is not 100% sure?
Many say Bitcoin doesn't have any intrinsic value, but what do you think about this:
Owning Bitcoin is an entry in a database that describes what you own secured by an indestructible supercomputer that is 1000+ times stronger than the next strongest super computer and where millions of people agree on.
I think this is one of the most valuable and secure things you can own………Only people don’t get it yet……..
Proof of Work (PoW) VS Proof of Stake (PoS)
Proof of Work is a consensus mechanism, but not the only one. Many altcoins are secured by Proof of Stake (PoS) and the proponents claim that it is better because no electricity have to be burned. PoS coins can be used to stake and enable the chance to create the next block and receive a reward for it.
However, PoS is not really proven on big scale, but more importantly, it will make the rich richer and this will finally lead to centralization. Rich owners of a PoS coin will earn the most without any expenses. This will make them even more rich over time and this will come with risk.
When a big entity can get 51% of the coins they will ‘own’ the entire network, but this chance / risk is not so big, only likely over an extremely long periode. More likely is that an entity get rich enough to manipulate the market (Less than 1% of the supply is enough) and start a pump and dump scene and use the profit to stake and become even more rich.
In PoW it is also risky when miners become too rich SEE BCASH, but at least they have external expenses to cover and have to sell minted Bitcoins. In a bear market there will even be a period where their Bitcoin stack is decreasing. Stakers will gain a bigger part of the total supply in bull markets and bear markets as well because they have no expenses and will be constantly rewarded (compounding).
But PoW cost a lot of energy…….
Many people complain about PoW that it cost a lot of energy, and it does. However, this is certainly no waste of energy, because extremely important features are created that can’t be created without electricity. Bitcoin will eventually replace many high energy consuming industries and probably be more efficient (delivered service / energy) than the current systems. I think there are better ways to ‘waste’ energy like Christmas lights and huge electric commercials in cities.
Also, it is estimated that the US military that ‘backs’ the US dollar is burning 4 times more energy than the total Bitcoin network, not even speaking about human lives and poverty.
Furthermore it is expected that miners can cause a break through in renewable energy. Bitcoin miners will be the new billionaires and 90% of their expenses is energy. The current energy industry is happy with the status quo, they can sell fossil energy and ask higher prices when it becomes more scarce. Miners however will invest greatly in renewable energy and try to use excessive energy sources as much as possible. More energy will be used, but cleaner and more efficient.
Conclusion:
Proof of Work is an important part of Bitcoin, it makes the network amazingly secure and makes trusted 3rd parties obsolete and thus eliminates fraud, human error and control. PoW is the only proven consensus mechanism and since the Bitcoin blockchain is backed by the most 'work' by far it is the only really secure blockchain.
Disclaimer
This is no investment advise, just my view on the market.
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