Consensus via Proof of Work

The creator of the original blockchain, Bitcoin, invented a consensus algorithm called proof of work (PoW). Arguably, PoW is the most important invention underpinning Bitcoin. The colloquial term for PoW is “mining,” which creates a misunderstanding about the primary purpose of consensus. Often people assume that the purpose of mining is the creation of new currency, since the purpose of real-world mining is the extraction of precious metals or other resources. Rather, the real purpose of mining (and all other consensus models) is to secure the blockchain, while keeping control over the system decentralized and diffused across as many participants as possible. The reward of newly minted currency is an incentive to those who contribute to the security of the system: a means to an end. In that sense, the reward is the means and decentralized security is the end. In PoW consensus there is also a corresponding “punishment,” which is the cost of energy required to participate in mining. If participants do not follow the rules and earn the reward, they risk the funds they have already spent on electricity to mine. Thus, PoW consensus is a careful balance of risk and reward that drives participants to behave honestly out of self-interest.

Ethereum is currently a PoW blockchain, in that it uses a PoW algorithm with the same basic incentive system for the same basic goal: securing the blockchain while decentralizing control. Ethereum’s PoW algorithm is slightly different than Bitcoin’s and is called Ethash. We will examine the function and design characteristics of the algorithm in Ethash: Ethereum’s Proof-of-Work Algorithm.

Ethereum also considers switching to ProgPOW, a more ASIC-resistant PoW algorithm, which is still under development at the time of writing.