1.21 What are Proof-of-Work Cryptocurrencies?
Proof-of-Work blockchains use miners to validate transactions and process network traffic.
There are numerous types of cryptocurrencies built for different purposes and with very different operating mechanisms.
In this lesson, we will explore Proof-of-Work (PoW) cryptocurrencies to find out what they are and how they work. Also, we'll look at the main use cases of Proof-of-Work crypto and find out which are the most popular PoW projects on the market.
A blockchain network consists of a linear string of data blocks, set chronologically from the first block, the genesis block, down to the latest one. This structure was introduced by Bitcoin, which is the first cryptocurrency in history and the first Proof-of-Work blockchain. Instead of utilizing a closed, centralized network structure like banks and other traditional financial institutions, the Bitcoin Proof-of-Work blockchain uses a fully decentralized operating mechanism.
Instead of nodes controlled by a centralized entity, Proof-of-Work blockchains, like that of Bitcoin, rely on thousands of decentralized network nodes operated by cryptocurrency miners. Each Proof-of-Work crypto node is a miner who utilizes their mining rig to process cryptocurrency transactions and contribute to the network by ensuring each transaction is valid.
The Role of Miners in Proof-of-Work Blockchains
Miners process blockchain traffic by searching for the appropriate hash for each transaction. A hash is an alphanumeric string of letters and numbers. Different Proof-of-Work cryptocurrencies use different hashing algorithms to check the validity of each transaction before the network approves the transfer and adds it to the next block of the blockchain.
The process is commonly referred to as hashing or mining because the mining rigs need to manually try out millions of hash combinations before they find the right one through trial and error.
Furthermore, the mining difficulty of Proof-of-Work cryptocurrencies is relatively high, and it's challenging for a single miner to find the correct hash for a transaction on their own. That's why miners team up in online mining pools, where they join their mining power to find the correct hashes faster.
Mining rewards are the main incentive for miners to validate transactions on Proof-of-Work blockchains. Each time they find the correct hash, miners present it to the rest of the network as a Proof-of-Work, hence the name of this type of blockchain. Several additional miners then run a quick check to ensure the hash is valid, and once it's approved, the miners involved in the hashing process get a reward of fresh coins. The mining process is how new Proof-of-Work crypto coins are produced.
PoW blockchains can't operate without miners. Also, thanks to miners, PoW blockchains remain decentralized since no single entity controls them, making it impossible to shut down a whole PoW blockchain like Bitcoin. Each miner keeps a copy of the blockchain on their rig, and all copies are automatically updated as new data blocks are added to the network.
How Secure Is a Proof-of-Work Blockchain?
One of the most critical factors contributing to a blockchain's security is its consensus mechanism. All Proof-of-Work crypto projects use the same core mechanism, which includes miners hashing transactions and requiring Proof-of-Work before they approve a transaction.
However, not all PoW blockchains are equally secure because the hashing algorithms can have very different complexity, hash approval requirements, and other measures for checking the validity of transactions.
Bitcoin's SHA-256 hashing algorithm is regarded as one of the most secure Proof-of-Work crypto hashing algorithms ever, and the Bitcoin blockchain has never been hacked.
To hack a PoW blockchain or any other blockchain, hackers would need to take control over at least 51% of all network nodes to change the contents of already existing data blocks. This means that they could steal crypto by transferring it to their own addresses from other people's crypto wallets. Luckily, the more network nodes a blockchain has, the more difficult it is to pull off such a hack. For example, Bitcoin has over 40,000 nodes, which makes a hack extremely unlikely.
Some Proof-of-Work blockchains process transactions considerably faster than others, at the cost of simplifying the transaction validation process. However, it's extremely difficult to trick the PoW mechanism. That's why PoW blockchains are considered highly secure, although they are much slower and have a considerably lower throughput compared to some Proof-of-Stake (PoS) blockchains that can process thousands of transactions per second.
What Are Proof-of-Work Cryptocurrencies Used For?
Proof-of-Work crypto is mainly used as digital cash or a digital store of value. Until September 2022, the Ethereum blockchain, one of the largest crypto ecosystems for launching decentralized apps (dApps), was also a Proof-of-Work blockchain. However, since Ethereum's transitioning to the faster and more efficient PoS network architecture, Proof-of-Work networks are mostly focused on digital cash features.
Proof-of-Work Crypto Examples
Let's have a look at some of the largest Proof-of-Work blockchains on the market today.
Bitcoin is the supreme leader of the cryptocurrency market and has occupied the number one spot ever since it was launched in 2009. Bitcoin was launched as the first decentralized digital cash currency in the world. The main idea behind Bitcoin is to provide users with a peer-to-peer medium for financial transactions.
Since then, Bitcoin has become more of a digital store of value than a currency for everyday payments because of its high value and
increasing popularity. Many crypto investors prefer to hold BTC long-term than to use it for payments.
Litecoin (LTC) was launched in 2011, two years after BTC, with the idea of becoming a lighter version of Bitcoin, more fit for everyday payments. While Bitcoin is commonly called digital gold, Litecoin is digital silver.
Businesses that accept crypto payments often include Litecoin as one of the supported payment options because the LTC blockchain is four times faster compared to Bitcoin. A LTC transaction takes around 2.5 minutes, compared to Bitcoin's usual 10-minute transfer time.
Dogecoin (DOGE) is the first and largest meme coin on the market, but it's also one of the oldest Proof-of-Work blockchains, launched in 2013. At the time of its launch, DOGE was a joke crypto created to give respect to the original Doge meme from the early 2000s.
Over the years, DOGE grew to become one of the largest coins on the market, especially after endorsement by Elon Musk, who often praises the coin during public events and on his Twitter profile.
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