Beyond Proof of Work

Why can the combined computational force of millions of computers only mine one bitcoin every 10 minutes? Puzzles. these cryptographic puzzles can only be solved by guessing combinations of inputs until the correct answer is found. Currently, Bitcoin takes about 25 trillion guesses to be solved.

Proof of Work (PoW) was initially conceptualized by Cynthia Dwork and Moni Naor in 1993 as a method to combat the growing problem of spam emails. The theory proposed that instead of charging money for emails sent, they would impose a different kind of cost – computational work. This cryptographic puzzle needs to be difficult enough to slow down the process, but not so difficult as to be impossible.

Although it was determined that this would impose too hefty of a burden on companies with legitimate email traffic, this concept hung around. It was adapted to secure digital currency in 2004, using the SHA-256 hashing algorithm. This is what Satoshi Nakamoto used to implement Bitcoin's consensus algorithm in 2009. This PoW-based algorithm prevented any single party from gaming the system. As the first mover in the realm of blockchain consensus algorithms, this has become the standard, but it is thoroughly sustainable.

Proof of Work increases in difficulty to match the growing computational power to keep block times relatively constant. This creates a vicious cycle of miners trying to get ahead of others by increasing their resources, which only makes it harder to mine a block. The total computational power of Bitcoin alone in 2021 was estimated to use 7 times as much electricity as all of Google, more than many countries. Beyond this, PoW is less secure than initially thought with the risk of a 51% attack especially viable through centralization and hash renting.

So if PoW isn't what it cracked up to be, what are our alternatives?

1. Proof-of-Weight: This is an umbrella term based on various consensus algorithms which force you to "pay-to-play" when it comes to cryptocurrency mining. You will have a weighted chance of completing the next block based on the relative weight of an asset you hold versus the total capacity. It is different than proof-of-stake because it is based on some other weighted value rather than the amount of crypto you have locked in. For example, proof-of-capacity is based on the amount of hard drive space.
   • Pros: Reduces computational intensity, scalable
   • Cons: Could further incentivize centralization
2. Proof-of-Elapsed Time: Similar to PoW, but uses less electricity since there is no cryptographic puzzle to solve. Instead, it randomly generates elapsed time to decide mining rights with a lottery system. The first to finish waiting for the given time gets to complete the block.
   • Pros: Reduces energy usage, scalable, transparent lottery results
   • Cons: Relies on a 3rd party (Intel) to be a fair actor
3. Proof-of-Authority: Instead of relying on it to be computationally improbable for an actor to take control of a blockchain, proof-of-authority uses trusted accounts to approve transactions. These validators must earn this right, and will lose their rights if they become a bad actor.
   • Pros: Delegation reduces computational intensity and energy use, reputation system incentivizes fair validations
   • Cons: high risk of centralization, convoluted process for who earns validation rights, need to validate identity in public domain
4. Proof-of-Stake: The most discussed alternative to PoW. Validators have a proportional chance to earn the privilege of approving a node, based on the number of coins/tokens they have locked in. These coins serve as collateral in the chance that the validator acts in bad faith.
   • Pros: Energy efficient, scalable, less reason to centralize (no economies of scale), increased throughput, lower barrier to entry
   • Cons: Control could be purchased, unproven at a large scale

Proof-of-Stake (PoS) will get its large-scale debut this summer as Ethereum switches its consensus algorithm from PoW. Although there are concerns with the relative security and the ability to be purchased, many believe these threats to be on par or even less relevant than when compared to the existing system. On the other hand, this switch is estimated to reduce the energy needs by more than 99%. Ethereum's PoS debut will likely decide the future of blockchain.