As I discussed in my previous post, blockchain relies on a system of special communication rules to make sure transactions between participants are not fraudulent. A handful of these systems exist currently, but the original algorithm is the Proof-of-Work system. The Proof-of-Work algorithm was proposed in the original Bitcoin cryptocurrency whitepaper, and later adopted by various other cryptocurrencies.
The Proof-of-Work algorithm allows multiple devices connected to the blockchain to validate individual transactions. Blockchain functions as a decentralized record of transactions that are not monitored and secured by a centralized third party i.e., a bank, government, or other legal entity. Having no centralized way to settle transactions, blockchains needed a way to settle and clear transactions while detecting fraudulent activity. To solve this many blockchains use the Proof-of-Work consensus algorithm.
For those who are unfamiliar with blockchain, a blockchain is a decentralized log of transactions (blocks) linked together in such a manner that if one block is modified, all the previous blocks change as well. In a Proof-of-Work based blockchain, each block of transactions must be verified before being added to the blockchain. To verify a block of transactions, devices called “miners” solve a very difficult mathematical problem, known as a hash, that proves that the block does indeed contain valid transactions.
Furthermore, miners are rewarded with money for completing the math problem which further increases the desire for cooperation by miners. By completing this process a blockchain is able to reach a consensus on which blocks (groups of transaction data) are added to the blockchain and which blocks, if any, contain fraudulent data. The completed hash is broadcast to the rest of the blockchain and the block is added to the ledger. Consequently, Proof-of-Work blockchains also achieve security across a decentralized network making it a secure digital payment system with no central governing authority and transaction clearing times in minutes rather than days.
Watch the video above for more information on Proof-of-Work blockchains.