Comprehensive Review of Proof-of-Work Consensus in Blockchain

  • Proof of Work (used by Bitcoin and Ethereum)
  • Proof of Stake (used by Ethereum)
  • Byzantine Fault Tolerance (used by Hyperledger)

What Is a Consensus?

Proof of Work

How PoW Works

Targets and Difficulty

Incentives and Rewards

Double-Spend Issues

  • The first transaction goes through the PoW and is added to the blockchain when the second transaction is submitted. In this case, the second one will be rejected when miners pull it from the transaction pool and validate it against all parent blocks.
  • Both transactions are submitted simultaneously and both go into the unconfirmed pool of transactions. In this case, only the first transaction gets a confirmation and will be added in the next block. Her second transaction will not be confirmed as per validation rules.
  • Both get confirmed and are added into competing blocks. This happens when miners take both transactions from the pool and put them into competing blocks. The competing blocks form a temporary fork on the blockchain. Whichever transaction gets into the longest chain will be considered valid and spent, and the other one within the block on the short chain will be recycled. When it is reprocessed, it will be rejected since it is already spent. In this case, it may take a few blocks to get the other one recognized as the double-spent one.

Advantages and Disadvantages of PoW

  • Energy consumption: PoW consensus, which uses a network of powerful computers to secure the network, is extremely expensive and energy-intensive. Miners need to use specialized hardware with high computing capacity in order to perform mining and get rewards. A large amount of electricity is required to run these mining nodes continuously. Some people also claim these cryptographic hash calculations are useless as they can’t produce any business value. At the end of 2018, the Bitcoin network across the Globe used more power than Denmark.
  • Vulnerability: PoW consensus is vulnerable to 51% attacks, which means, in theory, dishonest miners could gain a majority of hashing power and manipulate the blockchain to their advantage.
  • Centralization: Winning a mining game requires specified and expensive hardware, typically an ASIC type of machine. Expenses grow unmanageable, and mining becomes possible only for a small number of sophisticated miners. The consequence of this is a gradual increase in the centralization of the system, as it becomes a game of riches.

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