What is proof of work in blockchain?
We have already learned each block of the blockchain needs to be validated to create a consensus. The proof of work method means that a “miner” is solving cryptographic tasks and receive a reward for solving them. (That is where the name Cryptocurrency comes from.)
These tasks are complex calculations that are addressed by testing different solutions. With solving the calculation, the miner approves that the transaction which was saved on the block was made accurately. Usually, the difficulty of the tasks increases continuously. The rewards per block differ strongly from Cryptocurrency to Cryptocurrency.
(In 2009 as Bitcoin started each miner got 50 BTC per block. But every 210,000 coins the rewards halves. This happens approximately every four years. Currently (2018) each miner receives 12.5 BTC per block.)
You might ask, what will happen if all coins of a Cryptocurrency are mined?
Miners can also be rewarded with fees, which might increase if the rewards of mining in BTC go down. Mining is the only way new coins can get released into a network.
Most of the well-known Cryptocurrencies are using the proof of work algorithms, such as Bitcoin, Litecoin, Zcash, Siacoin, and others. Still, this method is heavily criticized, because solving the tasks to validate a block is not only time-consuming but also consumes a lot of energy, which makes them very expensive. This is one of the reasons why most of the best graphics cards by ASUS or NVIDIA are sold out because miners need them.
(Please note, when we talk about miners who “solve” tasks, they do not calculate 2+2=X. They “solve” complex tasks by trying out dif erent values.)
The often-criticized environmental problem is hard to judge - right now experts estimate a total electricity consumption (for 2017) of Bitcoin-mining of 17 terawatt-hours, which conforms to about 0.1% of the global electricity consumption. On first sight this looks like a lot for a currency that is not used by many people, but if we compare it to gold, for example, we can see that this is not as high as it first seemed. To make it easier, we can compare the total production of Bitcoin to the total output of gold and see how many barrels of oil they have consumed. Bitcoin (translated electricity to oil) consumes 6.6 million barrels per year (2017 estimation), while it took 123.2 million barrels to produce all the gold of 2017.
Right now, mining of the prominent Cryptocurrencies is not profitable anymore for most private people, due to the rising difficulty and high electricity costs (it still can be, when you decide to mine small market cap coins). That is also why there are so many “mining farms” in Iceland or anywhere else where electricity is cheap. Private people can now rent a graphics card there to mine for example BTC.
As a result, lately, the risk of a 51-percent-attack rose. A 51-percent-attack is the possibility of a mining pool manipulating the transactions due to their dominant position. This means that a mining pool with 51% of the mining power could double-spend the underlying Cryptocurrency (“selfish mining”).
In-game theory, there is a scenario called “Tragedy of the Commons”, which is stating that good is produced in lower quantities than the public desires, or consumed in greater quantities than desired.
Related to Bitcoin, this means there might be a point where the general incentives for mining will drop (when all Bitcoins are mined and fill only reward miners). This results in the increased possibility of 51-percent-attacks as the difficulty will fall as well.
(Double spending describes a process in which one person can distribute his/her assets twice. Imagine Person A owns 10€. If he has 51% of the mining power, he can send the 10€ to Person A and receive the consideration. After that, he would be able to continue a new block path and spend the 10€ again.)
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