How the Bitcoin Protocol Uses Proof-of-Work
One of the key elements of the Bitcoin protocol is the use of proof-of-work to confirm blocks and transactions. By requiring miners to expend computational energy in order to add new blocks to the blockchain, proof-of-work provides a disincentive for miners to engage in malicious activity, such as double spending or 51% attacks. Take a look at proof-of-work and why it's an essential part of the Bitcoin protocol.
How Proof-of-Work Works
In order to add a new block to the Bitcoin blockchain, miners must first expend a certain amount of computational energy—this is what is meant by "proof-of-work." The amount of computational energy required is known as the "difficulty level." The difficulty level is adjusted approximately every two weeks so that on average, it takes 10 minutes for a new block to be added to the blockchain.
The process of mining can be summarized as follows: Miners perform hash functions in order to guess the number of zeros in a number. Once they guess the number they select all the valid transactions to enter into the block confirmation. Nodes on the network validate these and the miner is rewarded with newly minted bitcoin and the fees from the included transactions.
"The proof-of-work involves scanning for a value that when hashed, such as with SHA-256, the hash begins with a number of zero bits. The average work required is exponential in the number of zero bits required and can be verified by executing a single hash." - Satoshi Nakamoto
Proof-of-work serves two essential purposes in the Bitcoin protocol: it protects against double spending and it protects against Sybil attacks. Double spending occurs when someone tries to spend their bitcoins more than once. Sybil attacks occur when someone tries to gain control of a large portion of the network by creating multiple identities.
In order for someone to successfully double spend their bitcoins, they would need to not only create a new transaction but also find a new valid block - all before any other miner does. This is highly unlikely because it would require an astronomical amount of computational power. As for Sybil attacks, proof-of-work makes it computationally expensive for someone to create multiple identities. This effectively limits Sybil attacks and protects against attempts to manipulate or interfere with the network.
Every two weeks, the Bitcoin protocol adjusts the difficulty level so that on average, it takes 10 minutes for a new block to be added to the blockchain. This adjustment is necessary in order to maintain the 10 minute block time. The difficulty level is adjusted by looking at how long it took to add the last blocks. If the time it took to add the blocks was more than it should be, then the difficulty level is decreased. If the time it took to add the blocks were less, then the difficulty level is increased. This ensures that on average, it takes 10 minutes to add a new block to the blockchain.
"To compensate for increasing hardware speed and varying interest in running nodes over time, the proof-of-work difficulty is determined by a moving average targeting an average number of blocks per hour. If they're generated too fast, the difficulty increases." - Satoshi Nakamoto
This is an important metric to maintain so that all the nodes in the network have time to stay in consensus. Too fast and all the nodes would not be able to communicate and verify transactions. Too slow and the network becomes inefficient. It's a perfect balance and effectively a mechanism to control time.
Proof-of-work is an essential element of the Bitcoin protocol that serves two key purposes: protection against double spending and protection against Sybil attacks. By requiring miners to expend computational energy in order to add new blocks, proof-of-work provides a disincentive for miners to engage in malicious behavior. As such, proof-of-work plays an important role in ensuring that the Bitcoin network remains secure and decentralized.