Cryptocurrency Mining – Proof Of Work Explained | Blockchain Central


Hey everybody and welcome to another episode
of BLOCKCHAIN CENTRAL! Today, I’ll try to break down how the proof-of-work
technology works. Before we start, please note that this content
does neither represent financial, legal, or tax advice, nor is it supposed to be understood
or interpreted as solicitation to buy or sell any securities, coins or tokens. We are going to unravel the science behind
the Proof-of-Work consensus mechanism underlying Bitcoin and other unpermissioned blockchains. The word “unpermissioned” means that everybody
has access to the system and everybody is allowed to write onto the blockchain. This stands in contrast to enterprise blockchains
being built right now, where only some predetermined nodes are allowed to write onto them. In the blockchain system, everybody is allowed
to validate transactions and add blocks to the blockchain. When it comes to the consensus mechanism,
it is a way to counteract the inherent disorder of an unpermissioned system. When everybody records information, a mutually-agreed
set of data is needed. One of those mechanisms is the proof of work
mechanism; so far the most popular and, by far, the most secure one. Broken down, proof of work means that a certain
amount of work – in the case of Bitcoin the ‘work’ is computing power – has
to be poured into the system. So, let’s assume, a person–Alice, wants
to send a Bitcoin to Bob. She’s broadcasting the transaction to the
network. Her transaction, along with other transactions,
is being collected in the Bitcoin mempool. The mempool is nothing more than a ‘virtual
pool’ where the transactions are being collected before they’re validated. The miners, who have access to this mempool,
pick some of those transactions, preferably the more profitable ones that come with high
transaction fees. Then, the working part begins. To understand how this works, we first need
to understand what a block in the blockchain consists of. The main parts of a block are A digital fingerprint of the last block, generating
an unalterable connection between two successive blocks A timestamp when the block was created A digital fingerprint of the accumulated transactions
in a block, the so-called merkle root And a so-called nonce, which is just a number Then, the required work consists of finding
a digital fingerprint, a so-called hash, that fulfills certain criteria. What’s a hash? In a nutshell, it is a digital fingerprint. Every digital value can be fingerprinted,
or rather hashed. For example, using the most common hashing
algorithm, the SHA256, the hash of the word ‘hello’ with a lower case “h” is: 2CF24DBA5FB0A30E26E83B2AC5B9E29E1B161E5C1FA7425E73043362938B9824 However, if you change the lower case “h”
to the upper case “H” as in “Hello” the hash becomes: 185F8DB32271FE25F561A6FC938B2E264306EC304EDA518007D1764826381969 So, we can clearly see that, if the input
data is slightly changed, the output data changes completely. Currently each Bitcoin hash has to have 18
leading zeros. The amount of zeros determines the difficulty
in Bitcoin. The more leading zeros are required, the more
difficult it is to find the hash. Among other things, each block includes the
digital fingerprint or the hash of the last block, the hash of the transaction data and
a timestamp. These are the data which cannot be changed
in any way, as it would compromise the system. Therefore, the only adjustable parameter is
the nonce. The miners choose a nonce randomly, then they
hash all the data and compare the output with the specified hash target. If the target is not met, a new nonce has
to be tried out. The whole process is based on so-called ‘brute
force’, which means that no shortcuts are allowed and that’s exactly what requires
a lot of computational resources and therefore, energy. As soon as the correct nonce, which is generating
the target hash, is found, the block is broadcasted to the network and the miner receives the
block reward, which is currently set at 12.5 bitcoins, plus the transaction fees for this
given block. The block is then added to the blockchain,
meaning that the whole transaction history is updated by every node in the network. The miners then start to work on the next
block, competing again to find the correct nonce for the next block. So, what do we take away from this video? Proof of work (PoW) is the consensus mechanism
used by the Bitcoin system and other blockchains. A consensus mechanism is needed in unpermissioned
blockchains to make sure that all nodes in the network write the same data so that a
common truth is created. The PoW mechanism is by far the most secure
mechanism in unpermissioned blockchains by now and therefore also used in other blockchains. The proof consists of finding a number, which,
together with the data in the block, generates a digital fingerprint that is required to
fulfill certain criteria. The whole process is very energy-intensive,
as there is no shortcut to finding the solution and the only way of finding it, is by investing
huge amounts of computational resources. Having found the nonce which satisfies the
requirements, the miner gets rewarded with bitcoins. Due to high energy requirements, other mechanisms
are currently being developed and tested. That’s it for this episode of Blockchain
central make sure to hit that like button if you liked this video and don’t forget
to subscribe to Blockchain Central to never miss a beat! Happy investing!

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