What is PoW mining – How it works | Pros and Cons| Key Features

What is PoS (Proof of Work) – We analyze what PW mining is – the key features, popular cryptocurrencies, extracted using the PoW consensus algorithm, advantages, and disadvantages of the protocol.

PoW mining is the principle of cryptocurrency mining, requiring the user to perform computational operations of a certain complexity. For the successful solution of the task, the miner receives a reward in the form of a certain amount of cryptocurrency. Since the calculations are carried out by special equipment, the income of the “miner” directly depends on the power of his equipment.

PoW mining: what is it, history of emergence, introduction to cryptocurrency networks

PoW mining

The abbreviation PoW stands for Proof-of-Work – proof of the work done. Speaking as simply as possible, this is one of the principles of cryptographic protection of networks, requiring a person to perform some lengthy operation, followed by checking its results. A special feature of the PoW protocol is the asymmetry of time – a lot more time is spent on finding a solution than on checking it. In peer-to-peer systems based on the Proof-of-Work algorithm, everything works according to the following fundamental principles:

  1. An active user (miner) performs useful work for the network, which we will discuss in more detail below.
  2. The miner receives a reward for doing the work
  3. In parallel, the system is protected from abuse of services (for example, from DoS attacks).
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Curiously, the idea of ​​the PoW consensus protocol originated long before the appearance of the first cryptocurrency. Back in 1993, it was proposed to form a certain algorithm that requires the computation of a complex but feasible function, which would give access to a specific resource and at the same time protect it from abuse. For the first time, this algorithm was put into practice in 1997, when Hashcash was launched on the initiative of Adam Beck. 

The Hashcash project was email oriented. The purpose of its implementation was to protect the platform from spam attacks. The essence of the system is quite simple:

  1. The sender spends some time calculating the hashcash coded mark (it is inserted into the message header). Also, some of the time is spent on sending a message. Thanks to the hashcash tag, each header becomes unique.
  2. The recipient, using their own computing resources, confirms the validity of the mark. In other words, he checks it for uniqueness, and if it is confirmed, it means the sender has spent time on the calculation and the letter itself can be considered useful.
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System Hashcash marked the beginning of the fight against spammers. The latter (for receiving benefits) should send a huge number of letters with minimal time costs. The need to select a unique label made such a process resource-intensive and unprofitable. Moreover, special filters appeared that separate useful emails from spam mailings. 

Despite the fact that the problem of spammers was not fully resolved, the Hashcash project became the foundation for the development of the PoW protocol, which was introduced into the Bitcoin system in 2009.

As is known, the Bitcoin network (as well as other cryptocurrencies) is a decentralized payment system operating on the basis of blockchain technology. In order for the platform to perform its primary functions (transfer coins from one user to another), the blockchain chain must be systematically replenished with new blocks of transactions. Miners are responsible 

for generating blocks. Their equipment selects a unique hash of the new network element (64-digit number). This operation is performed by sequential brute force, so the higher the power of the equipment, the more calculations it can spend in a given period of time (for example, it takes about 10 minutes to form a block in the Bitcoins network).

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After creating a new blockchain element, miners who participated in the process are rewarded with a certain amount of cryptomonet. The profitability of a miner is determined by his contribution to the work. For example, you can take the same Bitcoin:

  1. For example, 4 miners are involved in generating a new network element.
  2. Each participant has 25% of the power required to form a block.
  3. The group of miners considered by us generates a new unit in 10 minutes and receives a reward for it (as of December 24, 2017, it equals 12.5 BTC).
  4. Since all the “miners” gave the same power, the reward will be distributed equally between them: everyone will receive 3.125 BTC each.

This is a rather crude example, but it allows you to understand the fundamental essence of PoW mining. Moreover, the role of the “miners” becomes clear:

  1. They generate new blocks of transactions, constantly maintaining the operability of the network.
  2. Miners provide cryptocurrency emissions, increasing its volume in the market.
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It should be remembered that PoW is a consensus building protocol that can work on different encryption algorithms. Today, based on this protocol, such digital assets are mined:

  1. Bitcoin and Bitcoin Cash on the SHA-256 algorithm.
  2. Dogecoin and Litecoin on the Scrypt algorithm.
  3. Monero and Bytecoin at CryptoNote.
  4. Dash on the X11 algorithm.
  5. Ethereum Classic on Ethash.

Separately, it should be said that so far, ordinary Ethereum is mined on the basis of the PoW protocol. However, in 2019, a transition to the PoS platform should take place, which will change the mining principle of this popular asset.

How is PoW mining performed?

How is PoW mining performed

Cryptocurrency mining in this way requires several steps:

  1. Choose a digital asset. Our subsequent actions will depend on this. When choosing a coin, you should take into account the total hashrate (power) of the network and the complexity of mining (both parameters can be viewed at the site bitinfocharts.com/ru/). These characteristics will allow you to understand what kind of equipment you have to buy to get a normal income. It is also worth analyzing the current situation with cryptocurrency, read the forecasts for it and evaluate the prospects for the coming years.
  2. We prepare the room for the equipment . Even before the purchase of equipment, it is necessary to create optimal conditions for its operation. The room for mining should be well ventilated (especially in the summer). If necessary, you need to buy additional appliances for cooling (fans or air conditioners).
  3. We buy equipment. You have two options: buying one or several ASICs or build a farm of video cards. In the first case, you need to acquire miners specializing in the extraction of the asset of interest to you. For example, Bitcoin is mined on such models as Antminer S11, S15 or T15. To extract assets using the Scrypt algorithm, the INNOSILICON A6 is suitable. When choosing an ASIC, you should focus on the model’s hashrate and its power (in order to understand how much power the device will consume). On video cards today you can get such coins as Ethereum Classic, Zcash. It is advisable to collect a farm of at least 6 boards. Nvidia GTX 1060 models and AMD RX 480/580 boards are better for this. Remember that in addition you have to spend money on the motherboard, processor, RAM and power supply. Today, to build a more or less productive farm you need to spend about 3,000 dollars.
  4. Download the program for mining. Applications such as CG Miner (for Bitcoin), Miner Gate (for Bitcoin, Lightcoin, Ether, Monero, Dash and several other popular assets), Claymore’s Dual Miner (for the simultaneous extraction of Ether and one of 4 additional currencies – Pascal, Decred, Lbry or Siacoin).
  5. Register on the pool. You can choose classic sites that combine the power of several miners (pool.btc.com, antpool.com, f2pool.com). In addition, the network has resources that provide the opportunity to do solo mining (2miners.com/ru, solopool.org). 

    6. We get a wallet for storing the mined coin. You can choose specialized stores (for example, Bitcoin or Litecoin Core), or you can give preference to multi-currency wallets (Jaxx, Exodus). Online wallets (coin.space, blockchain.com), hardware storages (Ledger Nano S ) or paper media are also available.
  6. We calculate the profitability of mining in order to understand how much money the equipment will bring each month. When calculating, it is desirable to take into account the cost of electricity (determined by the current tariff). In addition, the calculation of profitability will allow you to understand how quickly you will get a plus (that is, pay for the equipment). Today it is most convenient to calculate profitability on the platform nicehash.com/profitability-calculator. But keep in mind that the data will change, as the complexity of mining almost always increases periodically.
  7. Set up a program for PoW mining and launch mining . The intensity of the equipment will depend on what you expect. If you need a steady monthly income, asiki and farms should get coins around the clock. To accumulate coins for the future, it is enough to periodically use the equipment (for example, to leave it overnight).
  8. After receiving the payment on the pool, we transfer the coins to the wallet. So you secure your coins in case the platform suddenly stops working. In the future, you can dispose of coins at your discretion: exchange them for fiat money (for example, through the service bestchange.ru) or start a cryptobirth (Exmo, Livecoin) in order to generate income from trading.
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Mining on the PoW and PoS protocols: what are the differences

Globally, PW mining differs from POS mining by the criterion determining profitability:

Mining on the PoW and PoS protocols
  1. On the Proof-of-Work protocol, the profitability directly depends on the power of the computing equipment.
  2. When using the Proof-of-Stake protocol, the profit will depend on the number of coins stored in the wallet of a particular user.

However, there are a number of other parameters that distinguish these algorithms, and sites that practice the concept of PoS are in a better situation. Judge for yourself:

  1. To start PoW mining you need to spend money on expensive equipment, to equip a room for it. Entry to PoS mining is more accessible. Today, currencies that only develop and are not very expensive work on this protocol. Therefore, a person needs to allocate much less money to invest.
  2. The 24-hour operation of the equipment leads to winding up precious kilowatts of energy for which you have to pay monthly. Such costs significantly reduce the total profit of PoW mining. When mining at PoS, it is enough just to keep the computer turned on, while it will operate at minimum power, so there is no cost for electricity as such.
  3. Mining under the Proof-of-work protocol carries with it much greater financial risks. You can spend money on equipment, and the cryptocurrency mined will depreciate. In the case of video cards, it’s still not so scary; If the boards are in good condition, they can be resold. But asiki is not going anywhere, so your thousands of dollars just disappear. Mining on the Proof-of-Stake initially requires less financial expenditure, so even if the asset collapses, the consequences for the miner will not be so dismal.
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At the same time, we should not forget about such a moment as fraud. It is much easier for attackers to implement their schemes with currencies mined at PoS. Assume:

  1. Fraudsters launch ICO and promise favorable terms of cooperation.
  2. Conduct the initial sale of coins.
  3. Receive income from the sale of emitted Coin.
  4. After obtaining the necessary profit, they stop supporting the platform or do not launch it at all.

As a result, investors find themselves with nobody needs coins, and money flies to the wind. 

With coins mined at PoW, this will not work. It is necessary to choose the optimal encryption algorithm, give the system functional highlights, develop software for the site, attract new users who will not purchase, but mine the cryptoactive. Even if, in the long run, the project turns out to earn and then “drain” it, the organizer will have to spend a lot of time and invest in the site itself. You understand, it is unprofitable for intruders. It is much easier for them to hit the bank in a short time and disappear. From this it follows that new projects on PoV are still safer.

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System problems of PoW mining

System problems of PoW mining

The main flaw of the protocol under consideration is the probability of “Attack 51%” The bottom line is that if one person or group of users concentrates more than half of the network hashrate, they will be able to confirm only their blocks, completely ignoring the elements created by other participants. Thus, the holders of the control power will take away all the emitted coins and will be able to block transactions. Moreover, attackers can rewrite the history of the creation of blockchain elements. As a result, their chain will catch up and overtake the original blockchain and become valid. This will lead to the loss of coins stored in the wallets of thousands of people.

It must be said that in networks operating on PoW, there is a high probability of double spending – retransmission of the same coins. This type of attack has 2 types:

  1. Race. The attacker translates X, paying for the purchase of goods. At the same time, he transfers the same coins to another account (transaction Y). If the implementer ships the goods before confirming the transfer, he takes a huge risk, since with a probability of 50%, transaction Y will receive confirmation.
  2. Finny’s attack is an even more interesting version of the scam. The attacker finds a block with his transaction Y. After finding the desired item, he immediately sends the transfer X, after which he purchases the goods. The implementer waits for confirmation of the transfer of X, and then ships the product purchased from him. If at the moment there are 2 blocks (with translations X and Y), a fork is created. The “miners” have to choose which network element to take to continue the blockchain chain. If an attacker has enough computational power, he can increase the likelihood of choosing a block with transaction Y. As a result, the initially confirmed transfer will not be 100% valid.
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Of all the flaws, the most likely is an attack of 51% (considering how much power is currently concentrated in China). The tricks with double spending, in fact, can be carried out by 1 person, but it is unlikely that those who have enough money for expensive equipment will be exchanged for these fraudulent schemes (especially not having an absolute guarantee of success).

Pros and cons of PoW mining

Taking into account all the above, we can identify such strengths and weaknesses of the protocol under consideration:

Benefits disadvantages
Provides good protection against DoS attacks. Requires the purchase of expensive equipment and arrangement of premises for it.
Large coin holders who managed to mine them at the dawn of the formation of cryptocurrency, can not affect the production, because everything determines the power of the equipment. Mining equipment consumes a lot of electricity, payment of which slows down recoupment and reduces overall profit.
Conducting some fraudulent schemes is possible, but it is costly. There is no guarantee of success. Therefore, the probability of such manipulations is quite low. As a rule, the complexity of the extraction of cryptomonet is growing, so the current capacity of the acquired equipment becomes irrelevant over time. In case of a sharp jump, the equipment can become useless very quickly, which means a waste of money.
Today, the PoW mined cryptocurrency, which has a number of years. During this time, they managed to prove their reliability and attractiveness for investors. This means that the probability of their collapse is less high than in the case of young promising assets at PoS. The collapse of cryptocurrencies with PoW mining is more painful, as it initially requires considerable cash infusions.
In all cryptocurrencies, the unit reward decreases over time. Sooner or later the moment will come when mining will be unprofitable at all.
Many cryptocurrencies on the PoW protocol already today have an attractive price. Thus, with proper investment you can immediately get a good income, and not spend money on the future. The protocol has a number of serious systemic flaws: attack 51%, double spending. To solve these problems within the algorithm itself is almost impossible. As a rule, such attempts lead to the emergence of new technologies (as, in fact, PoS was formed) or hybrid systems (for example, Proof of Research at the BOINC site).
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As you can see, PoW mining is a very profitable method of extracting cryptoactive assets (considering their current price), but it is not for everyone, as it requires serious cash infusions. Moreover, the protocol is not devoid of other flaws, forcing potential crypto users to give preference to cheaper and promising coins for PoS. But even today, on the basis of this technology, inexpensive Coins are being produced that can shoot in the future (for example, Ethereum Classic), so PoW mining can still be used as a method of accumulation for the future. The main thing is to choose the right prospective cryptocurrency.