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What are consensus algorithms?: Bitcoin and Proof-of-Work

Bitcoin, Proof-of-Work, Consensus Algorithms

All existing cryptocurrencies are secured by sets of rules called consensus algorithms. Bitcoin, the network which started it all, uses a consensus algorithm called “proof-of-work” to tell its users(nodes) how to determine which bitcoin transactions are accurate and should be recorded on its blockchain.

What is mining? (The Proof-of-Work Process)

The proof-of-work process is often called “mining” because the first Bitcoin user to prove the accuracy of a group of transactions and group them into what is called a “block” receives 6.25 Bitcoins in return(the current block reward).

During mining, each block is turned into an unrecognizable string of letters and numbers(encrypted) to keep its transaction information highly secure.

Picture a block as nothing more than a sort of spreadsheet that includes only up to 1 megabyte of this encrypted information.

Not every user can be a miner since as the Bitcoin network grows, its code raises the threshold of computing power needed to mine a single block.

This is done through increasing the difficulty in Bitcoin’s hashing algorithm, which is a few lines of code that determines how transactions are encrypted. In a later post, which will be linked here, I’ll analyze hashing to provide a better picture of why it matters to Bitcoin and cryptocurrencies at large.

For now, suffice it to say that all Bitcoin transactions are hashed from the moment they occur and not even miners see any sort of personal information about the people involved.

So, how does mining actually work?

Every ten minutes, all of the bitcoin transactions that occurred during that time are grouped together by miners(as suggested above).

These grouped together transactions are called blocks, which are pieces of Bitcoin’s blockchain, i.e., the distributed database that issues and tracks the movement of bitcoins.

Once miners form blocks, they then race to verify them in a sort of digital gold rush.

To avoid too much confusion at this time, suffice it to say that verifying a block involves solving a complex math problem that a traditional computer can’t handle.

The first miner to solve this problem is rewarded with 6.25 Bitcoins(the block reward), while the others receive nothing.

At this point, the block has been mined and the proof-of-work process begins again, in perpetuity.

The fact that all bitcoin transactions are always checked in this way keeps the network secure.

Why is Bitcoin the top cryptocurrency?

Since Bitcoin has always had the most miners, it has also always had the most computing power(hash power) pointed at it, making its consensus algorithm the most reliable and it, the most powerful network. This, together with the fact that Bitcoin was the first cryptocurrency ever has caused it to have the highest value as well.

Mining(the proof-of-work process) is one of many innovations in network security that Bitcoin has brought to the table.

Through its example, many other networks have adopted the proof-of-work process to stay secure. Since proof-of-work is highly energy intensive by design, however, many others have also chosen to use other consensus mechanisms, which I’ll dig into down the road. Before we get there, however, in my next post, I’ll focus on hashing and why it matters to Bitcoin. Until then, remember that you can always connect with me on Twitter @ExpatCrypto3.

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