What is a blockchain?

To proof-of-work , it is first important to understand what a blockchain is. A blockchain is a distributed database that is used to keep track of an unchanging, chronological series of digital transaction data. It is like a digital ledger split into blocks, with each block containing a number of transactions. These blocks are cryptographic (encrypted) connected: each new block contains a reference to the previous block, creating a chain of blocks, hence the name "blockchain".

The power of a blockchain lies in its decentralization; The data is stored over a network of computers, making it difficult for one entity to check or manipulate the information. This makes Blockchains particularly safe and very resistant to fraudulent activities or cyber attacks. This technology is best known for its application in digital assets such as Bitcoin and Ether, but it also has potential in other areas such as supply chain management, voice systems, and digital identity verification.

Trust within a decentralized network

In the context of blockchain, the 'problem of trust' refers to the challenge of guaranteeing integrity and authenticity of transactions within a decentralized network where there is no central authority to supervise or guarantee the reliability of transaction data. Traditionally we trust centralized institutions such as banks, governments or other trusted intermediaries to validate, verify and keep track of transactions. These intermediaries act as the authority that confirms the accuracy of the transactions, so that the parties involved can trust that their transactions will be implemented and registered correctly.

However, there is no central authority in a blockchain. A blockchain must therefore offer a system in which the participants who may not know each other or do not trust each other can still have faith in the integrity of the transactions. Solving this problem of trust is crucial for the functioning of a blockchain. The blockchain technology solves this problem through:

Cryptography
Each block within the blockchain contains a unique cryptographic hash (a kind of digital fingerprint of data) of the content, plus the hash of the previous block, creating an unbreakable chain. This guarantees that once recorded data cannot be changed without changing the entire chain.

Consensus mechanisms
A blockchain uses consensus mechanisms such as proof-of-work or proof-of-stake to ensure that all participants in the network reach agreement on the current state of the Ledger (the ledger). This means that no party can unilaterally change the information.

Decentralization
Because the blockchain is spread over many computers worldwide, the network is very resilient against fraud and attacks. There is no central point that can be compromised.

Because of these characteristics, the participants in a blockchain network can rely on the integrity and the immutability of their registered transactions, without having to rely on a central authority or intermediary. This trust in the system itself, instead of in a central entity, is what the problem of trust within blockchain solves.

Proof-of-work and its effect

As mentioned above, proof-of-work a consensus mechanism that requires that participants in the network, often called miners, make significant efforts in the form of calculation work to validate new transactions and add them to the blockchain. These efforts help network participants reach agreement on the state of the ledger (LEDGER) without a trusted authority being involved. Miners are the actors who proof-of-work . The process starts with a number of transactions that are waiting for confirmation, these transactions are collected in a new block. The miners then compete to add this block to the blockchain. They do this by solving a complex mathematical problem. The problem is designed in such a way that finding a solution requires a lot of computing power, but once a solution has been found, it is easy for other participants in the network to verify it.

The essence of the problem is finding a hash value that lies under a certain threshold. This threshold is called the 'Difficulty) ( Difficulty ) and can be adjusted to ensure that the time needed to find a new block remains approximately constant, regardless of the amount of computing power in the network. The miner who is the first to find a valid hash (a kind of digital fingerprint of data) gets the right to add the new block to the blockchain. As described, this new block contains a specific reference (the hash ) to the previous block, creating a continuous chain of blocks. The successful miner is rewarded for his efforts, usually in the form of a certain amount of the digital assets and the transaction costs of the transactions in the block.

Main features Proof-of-Work

Proof-of-Work (POW) is therefore a consensus mechanism in blockchain technology that is known for the following unique characteristics; Transparency, security and the energy and calculation intensive character. Transparency plays a crucial role in proof-of-work . Unlike in centralized systems, where decision-making behind closed doors can be made, proof-of-work an open and transparent method for validating and adding transactions to the blockchain. In this decentralized system, each miner has access to all transaction data and any added transaction becomes visible and verifiable for all participants in the network. This transparency ensures a trust within the network, because all actions are traceable and controllable, which leads to increased integrity and reduced risk of fraudulent activities.

Security is another fundamental aspect of proof-of-work . Miners must solve complex mathematical problems to add new blocks to the blockchain. These problems require significant computing power, which means that performing fraudulent activities or manipulating the blockchain is extremely difficult and expensive. This property ensures that the network remains safe, because it is unlikely that an individual or group can collect enough resources to control the majority of the computing power in the network, which would be necessary to compromise the system.

However, this high degree of security comes with a cost item in terms of energy consumption. Proof-of-work is energy and calculation intensive. Solving the mathematical problems requires intensive and continuous computing power, resulting in an energy consumption. This aspect of proof-of-work has led to concerns about the environmental effects, especially in the case of digital assets such as Bitcoin. However, various studies show that in 2023 a significant part of Bitcoin Mining runs on renewable energy, such as water, wind and solar energy. This sustainable development has gained momentum in particular in recent years. According to climate activist Daniel Batten, the percentage of using renewable energy by miners to 54.5% in 2023 (see here ) increased. This percentage is high compared to other industries in the world.

Conclusion

Proof-of-work is central to the functioning of blockchain networks. It offers a robust solution for the trust problem in decentralized systems through complex cryptographic methods. While it offers transparency and safety, it also entails the challenge of energy consumption. The recent shift to more sustainable energy sources for mining activities is a positive development that reduces the potential impact of this technology on the environment. This indicates an important development in blockchain technology, which continues to strive for a balance between advanced digital security and sustainability.

Link to the KPMG report on the ESG aspect of Bitcoin, click here .

This article was compiled by the BitStaeteInvestment Team. If you want to know more about the professional investing in Digital Assets, please contact us.