With “the merge” successfully transitioning the Ethereum blockchain from Proof-of-Work to Proof-of-Stake, there has been much discussion on the different ways to come to consensus in a blockchain, and the pros and cons of each.
What does Proof-of-Work mean?
Proof-of-Work blockchains are based on the consensus mechanism Proof-of-Work. Proof-of-Work is a method of sybil resistance used in blockchains. Sybil resistance refers to how a blockchain protects its mechanism of reaching consensus from being co-opted by malicious entities.
In essence, the sybil resistance mechanism of a blockchain must find a way to balance incentives, providing tangible benefits to acting benevolently and tangible losses to acting maliciously. The sybil resistance of a blockchain is critical to security, as a 51% attack can result in double-spend attacks and the blocking of transactions.
Proof-of-Work requires actors to expend energy in order to compete for the next opportunity to add a block to the chain. These actors, known as miners, expend energy through computers performing calculations. This ongoing expenditure of energy protects the network against bad actors, as any miner attempting to mine bad blocks will never receive a block reward, and will thus never be compensated for energy costs.
Different Consensus Mechanisms in Blockchain
While Proof-of-Work is the longest standing consensus mechanism used in blockchains, there have been other options explored in recent years. The most popular alternative to Proof-of-Work has been Proof-of-Stake, which replaces miners expending energy with validators with a “stake” of cryptocurrency proposing blocks. Another alternative mechanism of consensus called Proof-of-History has been developed by Solana, which implements native timestamping to the original Proof-of-Stake consensus.
While consensus mechanisms are critical to a blockchain’s decentralization and security, they do not define the protocol. Ethereum, for example, transitioned from the Proof-of-Work consensus mechanism to Proof-of-Stake in an event called the Merge.
Advantages of Proof-of-Work
Proof-of-Work has been used to secure blockchains for as long as they have existed. Through the unique ongoing costs of mining, miners are only incentivized to propose blocks they believe to be legitimate.
Proof-of-Work holds many advantages over alternative mechanisms of consensus and sybil resistance, particularly when it comes to censorship resistance. While Proof-of-Work mining pools are often pointed to as a centralization point, it is critical to understand that mining pools never take custody of hashpower – they simply direct it. Alternatives like Proof-of-Stake, however, can see weakened censorship resistance in the form of custodial staking pools. Regulated institutions having custody of a significant amount of stake poses an existential risk to censorship-resistant cryptocurrency.
In addition, Proof-of-Work is the only security mechanism that is not endogenous. While PoW miners may become unprofitable and temporarily cease operations during a major drop in price, the cost of hardware remains relatively consistent. Thus, the cost of attacking a PoW protocol is not only impacted by the price of the token, but also the availability of the required hardware. This is in stark contrast to Proof-of-Stake protocols, in which the cost of an attack is directly and irrevocably determined by the token’s cost.
Further, Proof-of-Work is an inherently faster mechanism of consensus than any subjective alternative. This is because when a Proof-of-Work blockchain progresses, data only needs to be propagated from the successful miner to the rest of the network. From there, other actors are able to see and validate the work done, and continue mining the next block to add to the chain. Every alternative mechanism requires at least double the required time from successful hash found to block accepted as new head, as signatures are required to be bounced back from multiple validators before the block can be considered legitimate enough to build on top of.
Disadvantages of Proof-of Work
While Proof-of-Work has many distinct advantages, it does have shortcomings. The most common criticism of Proof-of-Work revolves around the amount of energy it consumes.
Proof-of-Work inherently requires energy to be spent. This energy use had been largely negligible until Bitcoin’s explosive growth between 2017-2021, but by 2022 was accounting for between 0.2% and 0.5% of global energy consumption. This massive increase in energy consumption has led to many concerns on whether Proof-of-Work is a sustainable way to secure blockchains and how its gluttonous consumption can be reduced.
Another heavily criticized aspect of Proof-of-Work is the high hardware requirements. Bitcoin miners, for example, largely use specialized computers called ASICs that are dedicated to hashing as fast as possible. While these machines are highly efficient, they are also extremely specialized and cannot easily be repurposed. This seemingly wasteful aspect of Proof-of-Work is actually critical for its security, as the specialization of ASICs ensure that their cost can only be recouped through benevolent mining. Even if an entity is able to accumulate the necessary ASICs to co-opt a PoW chain, those ASICs will become useless if the chain’s security (and thus value) is compromised.
What is merged mining and why is it important?
In the midst of the hype around Proof-of-Stake, projects like Quai Network are exploring opportunities to address the existing inefficiencies of Proof-of-Work. One area that has demonstrated major potential in both reducing PoW’s energy inefficiencies is merged mining.
Merged mining is the process of mining more than one blockchain simultaneously, and was originally proposed by Satoshi Nakamoto on BitcoinTalk in 2010. When merged mining, miners are checking the hashes they generate against the difficulties of multiple chains. When a valid hash is found, a block can be produced on the chain that the difficulty was fulfilled on (or on multiple chains if the hash fulfilled multiple chains’ difficulty requirements).
The concept of merged mining has historically been used to allow new blockchains to bootstrap hashpower from existing networks, as in the case of Namecoin. Quai, however, is exploring the potential for merged mining to create a new network of interconnected blockchains that remain decentralized and share security while supporting massive throughput.
Merged mining could be critical in reducing Proof-of-Work’s energy usage. By merged mining, a miner is securing multiple blockchains with no increase in energy use. This can be seen to drastically reduce the kWh/transaction of a decentralized system without impacting security.
Conclusion
While Proof-of-Stake can seem to be a promising solution to Proof-of-Work’s energy use, merged mining has the potential to drastically reduce PoW’s existing inefficiencies while retaining its unmatched incentive structure and censorship resistance.
Through the use of merged mining, Quai is building a highly decentralized Layer 1 network of interconnected, interoperable blockchains. By rebuilding Proof-of-Work for a hierarchical-merged-mined environment, Quai has created and utilizes the Proof-of-Work 2.0 consensus mechanism to secure the network.
Join us to build a better blockchain.
Quai Network is an open-source Proof of Work blockchain network utilizing the capabilities of merged mining to increase throughput and security. Users of Quai Network will enjoy fast transaction times without compromising decentralization and security. Miners will have competitive mining opportunities across the many blockchains within the network.
Capable of thousands of transactions per second, the Quai Network is a Proof-of-Work solution to scalability that is soon to be ready for mainnet release.
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