Last updated on April 15th, 2015 at 10:39 am
This video contains advanced concepts that were discussed in previous videos. If you’re new to Bitcoin we suggest watching the previous videos before this one.
In order for a miner to actually enter his block of transactions into the blockchain he will have to provide an answer, or a proof, to a specific challenge. This proof is difficult to produce but is very easily validated. This is known as Proof of Work.
For example – guessing a combination to a lock is a proof to a challenge. It’s very hard to produce this since you will need to guess many different combinations – but once produced it’s easy to validate. Just enter the combination and see if the lock opens.
Bitcoin uses the proof of work concept in order to make sure that the network isn’t easily manipulated by making mining, the process of inserting blocks into the blockchain, require great computing power.
But the proof of work concept has some downsides as well. First, a lot of computing power and electricity are wasted just for the sake of generating random guesses. Second, if proof of work continues we may run into the “tragedy of the commons” scenario. Let me explain…
In the future, once no more mining bounties will be given, miners will gain only transaction fees. Since including transactions is pretty inexpensive for miners they will accept any fee which will gradually cause people to pay less fees and miners to earn less money. In time fewer miners will mine Bitcoins, the network difficulty will decrease and the Bitcoin network will be more susceptible to 51% attacks.
One alternative suggested to the proof of work concept is the Proof of Stake concept. Rather than requiring a proof to a challenge, a proof of stake system requires to show ownership of a certain amount of money. Meaning the more Bitcoins you own the more mining power you have.
This eliminates the need for expensive mining rigs as calculations are pretty simple to prove you own a certain percent from the total amount of Bitcoins available. Just imagine that mining rigs have been replaced by coins, and if you own 1% of the total amount of Bitcoin available you can mine 1% of the transactions.
This methods forces miners to have a stake in the Bitcoin network and hopefully will deter people from abusing their mining power (since they will be devaluing their own coins). Today Bitcoin has yet to implement the proof of stake concept but other altcoins like Peercoin have already implemented some kind of version of it.
For a more detailed explanation about Proof of Work visit this link.
For more information about Proof of Work VS. Proof of Stake.
For an active discussion in BitcoinTalk about POW Vs. POS.