5min read
Published on: Apr 17, 2024
#Blockchain
As we approach the next Bitcoin (BTC) halving expected in just a few days, there is a palpable excitement among the mining community for the upcoming event.
Bitcoin mining relies on the proof of work (PoW) consensus mechanism, the reward for which will reduce from 6.25 BTC to 3.125 BTC this month.
Bitcoin is not the only blockchain that employs the PoW mechanism; in fact, a number of major blockchains such as Litecoin (LTC) and Dogecoin (DOGE) rely on PoW.
There is a lot of discussion around PoW but not a lot of people understand the technology in its entirety.
PoW is a key concept to understand if you want to grasp the broader financial implications of the blockchain economy.
Primarily, there are two types of consensus mechanisms:
Today, we will explain the PoW consensus mechanism in detail and its importance in the realm of Web3.
Firstly, we must understand what crypto mining is.
Recommended Read: Is Bitcoin Mining Worth It?
Cryptocurrency is a digital form of currency. The way fiat currency is minted, cryptocurrency is mined.
Crypto mining is the method through which new crypto tokens are minted and new transactions are validated.
Let’s take an example to understand the concept of crypto mining.
It often happens that when you visit a website multiple times, it asks you to recognise a pattern among a set of images to verify that you are a human.
In the example above, you recognise and select all the images with stairs.
The system recognises that the user on the other end has solved a puzzle and put in effort and time for the same.
Consequently, you can open the website on your workstation.
Crypto mining is pretty similar.
Once it recognises that the block has been generated with effort and time, the system verifies and adds the block to the chain.
Unlike a centralised mint, cryptocurrency is mined through a set of miners who are spread across a decentralised blockchain network.
It uses PoW consensus mechanism for verifying and adding new blocks.
Proof of work (PoW) consensus mechanism was first conceptualised by Hal Finney in 2004.
Bitcoin was the first time the idea was introduced to the world of cryptocurrency in 2009. It was Finney who received the first Bitcoin transaction.
In the PoW mechanism, miners need to prove that they used computing power to generate blocks during the mining process.
The first miner who successfully generates the target hash gets rewarded in Bitcoin.
The more miners are involved at a time, the higher is the difficulty level to process hashes.
Here is how the PoW mechanism works.
A cryptocurrency’s record of transactions is recorded on a distributed ledger. This ledger is known as a blockchain.
When a new transaction is submitted to a blockchain, it is contained along with other transactions in a hash.
Miners are individuals who compete with one another to generate a hash that nearly matches the hash of the block containing these transactions.
Validators verify and confirm each block in order for it to be added to the blockchain.
The miner who first generates the matching hash is rewarded in newly minted cryptocurrency in exchange for their efforts.
Since creating a matching hash involves a trial-and-error method to solve the puzzle, a miner’s success rate is proportional to their computing power.
Miners use complex computing devices to generate hashes and aim to create the matching hash first in order to earn the rewards.
Note that while crypto mining is a difficult enterprise, verifying blocks is a relatively much easier process.
Let’s take the example of Bitcoin blockchain.
The difficulty level of mining increases or decreases, depending on whether miners are adding blocks quickly or slowly.
For now, a miner is rewarded 6.25 BTC for adding one block to the chain. The next halving will reduce it to 3.125 BTC.
The PoW consensus mechanism has a bunch of benefits. However, we need to take note of its disadvantages as well.
Advantages | Disadvantages |
Reliable method of block verification | Energy-intensive mechanism for crypto mining, making it unpopular among proponents of sustainable energy usage |
Highly secure method | Cannot facilitate faster transactions |
Beneficial to miners looking to earn rewards in cryptocurrency | PoW, though profitable, cannot be afforded by many miners due to its very expensive equipment. |
PoW is a consensus mechanism that is used by a majority of blockchains that primarily focus on cryptocurrency.
For each new block being added to the chain, thousands of miners compete with one another for the rewards.
It leads to a cutthroat competition among the miners possessing the most computing power.
In many cases, several small players come together to form a mining pool so that they make up one large unit mining the cryptocurrency.
The method has been extensively criticised for its high energy consumption. In fact, it consumes as much power as a few small countries.
Nonetheless, most blockchains continue to employ PoW for block verification and addition.
However, the largest cryptocurrency after Bitcoin, Ethereum (ETH), transitioned from PoW to PoS mechanism to address the challenge of sustainability.
Keep following the BitDelta Academy to learn more about the fundamentals of blockchain and crypto technology.
PoW-based cryptocurrencies are among the leading virtual assets in the Web3 economy in terms of value and market cap. You can trade these cryptocurrencies, including BTC and DOGE, easily and quickly on the BitDelta app.
Click here to begin your journey to financial revolution with BitDelta.
This article is for informational purposes only and not intended as investment or financial advice. It contains opinions and speculations that are subject to change without notice.
The author and publisher disclaim any liability for decisions made based on the content of this article. Readers are advised to conduct their own research and consult a financial advisor before making investment decisions.
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