Cryptocurrency Mining and Proof of Work Algorithms

There is a lot to consider when you first begin mining cryptocurrency. A big part of mining involves consensus. Consensus is the process of ensuring everyone’s copy of the transaction data matches — that every copy of the blockchain contains the same data. Different consensus methods can be used for cryptocurrency mining, but currently the primary method is known as Proof of Work (PoW).

However, this method has less secure and trustworthy alternatives. As the cryptocurrency and blockchain space grows (it’s rapidly expanding all the time), it is possible that a different system may end up becoming the “One who Rules them all.”

The most secure, trusted, yet energy intensive of all the consensus systems, Proof of Work undeniably has the best track record. Having existed since the birth of Bitcoin, PoW has been instrumental in maintaining an unbroken chain of transactions since January 2009!

Proof of Work predates cryptocurrency blockchains, though. Proof of Work was originally developed as an idea for a process to counter junk mail.

The essential concept of Proof of Work is that in order to use a particular service — to send an e-mail for example, or to add transactions to a blockchain — one has to show that some form of work has been carried out.

The goal is to inflict a modest cost (in terms of the computing power required to run the Proof of Work algorithm) on the person wanting to use the service once, but to make it very expensive for someone to use the service thousands or millions of times. This makes it cost prohibitive to attack or disrupt Proof of Work systems.

The concept of using PoW as a countermeasure dates back to around 1993, and since then quite a few different ideas for ways to use PoW have emerged. In the context of cryptocurrencies, Proof of Work prevents malicious miners from clogging up the network by submitting new blocks that can never be verified. If no work was required to submit a new block, anyone could repeatedly spam fake transactions inside new blocks and potentially grind the cryptocurrency network to a halt.

By the way, Proof of Work has a parallel in real-world currencies. For something to work as money, it has to be in limited supply, so either it’s something that there simply isn’t much of — gold, for example — or it has to be created through a process that takes significant effort.

How about sea shells, then? Sea shells have been used by various cultures as money. Consider wampum, sea shell money used by Native Americans in the East of the continent well into the 18th century. “Shells,” you say, “how much work does it take to pick up shells off the seashore?” Ah, but there was more to it than that.

Wampum was made from very specific shells (the Channeled whelk and the quahog or poquahock clam shells), found in a very specific area (along Long Island Sound and Narragansett Bay).

Furthermore, you couldn’t just grab a whelk and buy dinner with it. You had to work the shells. The shells were cut down; for example, it was the inner spiral, the columella, of the Channeled whelk, that was used. Then the craftswomen (it was mostly women making wampum) drilled holes through the shells using wooden drills, and the shells were then polished on a grinding stone until they were smooth. They were finally strung together using deer hide or various other materials. This work ensured time and effort had to be put into the “currency” so that it could acquire value.

Another way to look at this concept is not that the money is “acquiring” value, but that it can’t be created without a significant input of work, so the market can’t be flooded with new, low-cost versions of the money, devaluing it.

Even the early European colonists used wampum. It wasn’t until they began using more advanced manufacturing techniques to create wampum, lowering the cost of the creation of this currency and destroying the scarcity of the currency, that the value crashed, and wampum was no longer viable as a store of value and currency.

Miners frequently have trouble fully getting the idea of Proof of Work and how it fits in when they first got involved in cryptocurrency. In case any readers are still trying to understand the purpose of PoW, let’s put it another way. The whole point of the work that the miners do (competing with each other to win the Proof of Work contest) is to ensure that adding a block to the blockchain isn’t easy.

If it’s too easy, the blockchain is vulnerable. Bad actors could continually attack the blockchain by flooding the system with bad blocks. The idea of Proof of Work is to make adding a block difficult, rather like the whole idea of laboriously hand-working shells into wampum was to ensure that the wampum economy couldn’t be flooded with cheap wampum.

Proof of Work applications

A Proof of Work algorithm forces the miner to do some work — to use computational power — before submitting a block to the blockchain. The algorithm acts as security for a cryptocurrency by making unwanted actions costly and ensuring the intended outcome (the addition of only genuine, valid transactions to the blockchain) always occurs.

So what work must be performed? Essentially the miner is required to solve a mathematical puzzle of some kind. The puzzle needs to be complicated enough to take some computational power, but not so complicated that it will take too long to validate and slow down the addition of transactions.

The work being performed in Bitcoin’s Proof of Work is just hashing the previous block of transaction’s header (along with a random number, the nonce) in the hope of finding a new hash that meets the required difficulty threshold.

There’s a flip side to Proof of Work. Finding the answer to the puzzle has to be difficult, but checking and verifying the work has to be easy. That is, once the puzzle has been solved, it must be easy for other miners to check that indeed the puzzle has been solved correctly.

In the case of bitcoin, once a miner has solved the puzzle, the new hash is added to the header and the block sent to other miners and nodes to confirm. While it’s hard to initially pick a nonce that will provide a good outcome — a hash number below the target level — once the nonce has been found, it is very quick and easy for other miners to run the same hashing calculation to confirm that indeed the puzzle has been solved. The work is done, and then everyone can quickly check the winning miner’s block and sign off on it.

Note, by the way, that cryptocurrencies using Proof of Work are usually the only ones that require more efficient, specialized mining equipment. In Proof of Stake, almost any computer can act as a creator, verifier, and chainer of new blocks, as long as it has a significant stake in the underlying currency.

Proof of Work examples

The use of Proof of Work is widely adopted in the cryptocurrency world. The largest and most successful cryptocurrency of them all, Bitcoin uses it along with a host of other popular cryptocurrencies. You may need different mining equipment for these cryptocurrencies, as each has a slightly different hashing algorithm, even though they all use Proof of Work. Here are a few examples of the more common PoW cryptocurrencies:

• Bitcoin is currently the king of cryptocurrency in terms of network hash rate (that is, the number of hashes being processed every second), market liquidity, and over all adoption. Bitcoin has never not been the top cryptocurrency. Bitcoin pioneered Proof of Work and has been going strong for more than ten years on the back of this consensus system.

Many other cryptocurrencies have copied the code of Bitcoin as a starting point and then modified it slightly for their own use. Most of them kept the Proof of Work component, although they may use a different hashing algorithm requiring a different mining rig setup than the one for Bitcoin. Most capital in the cryptocurrency mining world is directed to Bitcoin, and the mining rigs used are specialized in preforming the Sha256 hashing algorithm native to Bitcoin consensus. Bitcoin-specific ASICs (Application Specific Integrated Circuits) are now a large percentage of the system, and many are based in China, with the United States and Europe closely tied in second place.

• Ether (on the Ethereum network) is usually the second most popular cryptocurrency, sometimes the third, depending on the day. Ethereum uses its own hashing algorithm for Proof of Work called Ethash. Don’t worry too much about what Ethash is though, as the Ethereum development team has controversial plans to leave Proof of Work behind and use Proof of Stake in the future. In fact, they have a difficulty “bomb” baked into the Ethereum code. As time goes on, it becomes harder and harder to mine Ethereum via Proof of Work, meaning miners earn less and less. (Despite this bomb, when the price of ETH was at all-time highs, mining Ether was still very lucrative.)
• Litecoin is generally considered the silver to Bitcoin’s status as “digital gold.” Litecoin focuses on fast payments (meaning quicker block times) and low transaction fees. It uses a different hashing algorithm from Bitcoin, referred to as scrypt mining, so no crossover mining (using the same mining rig for multiple cryptocurrencies) is possible between the two. Other than that, though, in general, the way Litecoin works is very comparable to Bitcoin, as it was essentially a copy of the code. Just like Bitcoin, ASICs have been designed to specifically mine Litecoin, providing the most profitable approach.
• Monero, one of the more private (anonymous) cryptocurrencies, was built to allow CPU or GPU mining. That is, you don’t need specialized equipment; the Monero community makes a point to keep ASICs out, updating the mining algorithm slightly every few months so manufacturers can’t produce ASICs. It’s always possible to build an ASIC designed to process a particular algorithm more efficiently, but it’s possible to outrun the changes; it takes time to design, produce, and sell a new ASIC.

By switching to a different PoW algorithm every so often, Monero has effectively outrun chip manufactures. This allows CPUs and GPUs to remain effective on that blockchain. Monero uses a very complex cryptographic mechanism called ring signatures to hide transaction amounts associated with addresses, making it very hard to analyze the transactions. This sets it apart from the other cryptocurrencies in this list, which have easily searchable public transaction records on the blockchain.

• ZCash is also a more private (anonymous) cryptocurrency. It was built using a trusted setup ceremony, as ZCash calls it, with public cryptographic parameters split between various trusted parties. (This is complicated stuff, but if you want to read more, check out the ZCash site). The ZCash blockchain allows for the use of shielded cryptographic transactions (called zk-SNARKs) that are nearly impossible to track.

However, these shielded transactions are computationally expensive, and many ZCash wallets available today do not fully support this feature, instead relying on publicly auditable transactions very similar to Bitcoin. The ZCash proof of work mechanism is referred to as However, unlike Bitcoin, in which the entire block reward goes to the winning miner, ZCash shares the block reward; there’s a miner’s reward, but also a founder’s reward and a developer reward, to compensate the team that created and maintains the ZCash codebase and blockchain.

Upsides of Proof of Work

The main upside to Proof of Work is that it works! No other system for reaching and maintaining consensus has as long and impeccable a record as Proof of Work. The game theory behind Proof of Work ensures that if all participants are rational and acting in their own economic interests, the system will function as intended, and so far that has been the case.

Proof of Work also prevents spamming of the network from malicious miners. The energy and equipment expenses required to carry out the specialized work makes attacks cost-prohibitive and unsustainable.

Another great benefit to Proof of Work is the balancing of power. Power is spread over a wide range of miners, thousands in the case of Bitcoin. The amount of cryptocurrency owned by a particular miner is irrelevant; it’s the computing power that counts

Conversely, with Proof of Stake systems miners stake currency — the more they own, the more power they have, so power over the system can become concentrated into the hands of a small number of stakers, especially so for coins’ initial coin offerings, also known as premined distributions.

This is another advantage that most Proof of Work cryptocurrencies have: fair distribution. To have found a block and gained the subsequent block reward, a miner must have provided adequate work and supported the network according to the ruleset. This, according to cryptocurrency game theory, provides an important incentive. Proof of Work mechanisms, under this theory, ensure that it is much more economically beneficial to work toward consensus than against it.

Game theory is a branch of study involving mathematical models that describe likely decision-making by rational decision-makers in some kind of relationship. Decisions made by these decision-makers, or actors, affect the decisions and actions of others. Thus, within cryptocurrency, the goal is to incentivize all actors to make decisions that result in a stable, trusted network.

Downsides of Proof of Work

A big downside to Proof of Work is the resources required to perform the work.

The Bitcoin network, which has the largest number of miners, uses at least the same amount of electricity as the country of Slovenia. Some rougher estimates put it as double that, or comparable to the amount used by Ireland.

Another downside is that over time, the mining under Proof of Work can also become centralized. The setup cost for a mining operation is not insignificant. Those who already have a data center and ongoing mining operations are in a much better position to add rigs. With a lower cost per mining rig, over time, those who were first movers outcompete later entrants, and centralization can occur.

Related to this centralization is the potential for 51 percent attacks, a major concern for anyone who mines a Proof of Work cryptocurrency. A 51 percent attack can occur when a single entity gains control over 51 percent (or more) of the total active hashing power.

In this scenario it becomes possible for this majority hash controller to modify a cryptocurrency’s blockchain record, destroying the trust fundamental to its existence. It is for this reason that decentralization of miners is promoted and encouraged in the cryptocurrency realm.

A final downside to Proof of Work is the wasted calculations that all the Proof of Work requires! While the possibility of Denial of Service attacks making a cryptocurrency unusable are very real, and thus the Proof of Work mechanism protects the blockchain, the search for a nonce provides no economic, social, or scientific benefits to anyone outside of the cryptocurrency’s ecosystem.

In other words, once the thousands of miners have played the game and one has solved the puzzle and added a block to the chain, there is no residual value to all that computing power; one might argue that the power has been wasted on a pointless game.

The short story made long is that Proof of Work is the most proven way miners have of keeping a peer-to-peer cryptocurrency system operational. While there are indeed areas for efficiency improvements, no other solution can provide the same security benefits without different economic, consensus, and computer engineering tradeoffs, and due to this, Proof of Work will remain widely utilized.