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@ Bitcoin Infinity Media
2025-04-16 12:11:27This is a part of the Bitcoin Infinity Academy course on Knut Svanholm's book Bitcoin: Sovereignty Through Mathematics. For more information, check out our Geyser page!
Proof of Work
Zoom out of time for a while and imagine how the antlers of a magnificent moose buck evolved into being. The main purpose of big antlers in nature is believed to be a way for the buck to impress potential mates. They’re somewhat akin to the feathers of a peacock, or the shroud of any male bird for that matter. The animal is trying to signal that it can thrive in its environment despite its enormous appendage. It’s there to tell the potential mate that this specific specimen will bring her strong, healthy offspring. These are all evolutionary metaphors, of course — the animal itself is probably unaware of signaling anything. For such antlers to evolve into being, a whole lot of moose will have to die early, or at least not get a chance to reproduce, over thousands of generations. In other words, a lot of resources need to be wasted. All of this for the animal to prove its value to potential spouses. Therefore, from the surviving moose's point of view, the aforementioned resources were sacrificed rather than wasted.
The Proof of Work algorithm in Bitcoin does a similar thing. It enables miners to sacrifice a lot of electricity, a real-world resource, to find a certain number, thereby proving that they had to commit a lot of time and effort to do this. Time, by the way, is the scarcest of all resources. Because of all this, a Bitcoin miner is very reluctant to sell Bitcoin at a net loss. The electricity has already been used when the Bitcoin pops into existence, and the miner has no other means of getting his money back than by selling the Bitcoin for more than the cost of the electricity it took to produce them. This is assuming that the mining rig itself has already been paid for. Proof of Work is a way of converting computing power into money, in a sense. Yes, these rigs consume a lot of energy, but the energy consumed correlates directly to the actual value of the created token. Any decrease in the energy expenditure would also lead to a decrease in the value of the token. Not necessarily the price but the actual value. This is the main reason mining algorithms can’t be less resource-consuming or more energy-efficient. “Wasting” energy is the whole point. No “waste,” no proof of commitment.
The fundamental principles of Bitcoin were set in stone in 2008, and block #0, the so-called genesis block, was mined in January 2009. In Bitcoin, a block of transactions is created every ten minutes. In its first four years of existence, these blocks included a 50 Bitcoin block reward given to the miner who found the block. Every four years, this reward is halved so that the maximum amount of Bitcoin that can ever be claimed can never exceed just short of 21 million. Every 2016th block, or roughly every two weeks, the difficulty of finding a new block is re-calibrated so that a block will be found every ten minutes on average. The value of this feature and the impact it has on coin issuance is often understated. It is one of the features of Bitcoin that separates it from gold and other assets in one of the most subtle yet most powerful ways. When the price of gold or silver or oil or any other asset goes up, producing that asset becomes more profitable, and more resources are allocated to produce more of it faster. This, in turn, evens out the price as the total supply of said asset increases.
Gold has been able to maintain or increase its value long term over time because of its high stock-to-flow ratio. Stock refers to the supply of an asset currently available on the market. Flow refers to the amount added to the stock per time unit. The bigger the stock in relation to the flow, the less of an impact on the total supply an increase in the price of a specific asset has. In Bitcoin, a price increase has virtually no impact at all on the coin issuance rate (the flow) since the difficulty of finding the next block in the chain is constantly being optimized for a strict issuance schedule. No other asset has ever behaved like this and we are yet to find out what impact its existence will have on the world economy.
So, how does one mine a block in the Bitcoin blockchain? In short, the mining process goes something like this: every active node in the Bitcoin network stores a copy of the mempool, which contains all Bitcoin transactions that haven’t been confirmed yet. The miner puts as many transactions as the block size allows into the block, usually selecting those with the highest fee first. He then adds a random number, called a nonce, and produces a hash of the entire thing using the SHA-256 hashing algorithm. A hashing algorithm turns data into a string of numbers. If the resulting hash begins with a specific number of zeros decided by the current difficulty of the network, the miner wins the block reward, collects all the fees, and gets to put the block on the blockchain.
The beauty of the system is that it is trivial for the nodes in the network to verify the block so that no double spending can occur, but it’s near impossible to forge a fake hash since the probability of finding one that begins with as many zeros as the difficulty of the Bitcoin network demands is extremely low. To a layman's eye, a hash beginning with a bunch of zeros just looks like a random number, but a person who understands the mathematics behind it sees a different thing. The zeros act as proof of an enormous commitment to trying out different nonces and trying to find a perfect match. If you’re able to understand these huge numbers, you quickly realize that this number must have been created by devoting computing power to doing just that on an absolutely massive scale. The proof is in those zeros.
If you compare just the hash rate of the top five so-called cryptocurrencies, it is obvious that Bitcoin is on a different level security-wise. From a hash rate to security perspective, the Ethereum blockchain is about five times as ineffective, and the Litecoin blockchain about ten times as ineffective as the Bitcoin blockchain at the time of writing.1 This in addition to the obviously more centralized nature of these “alternatives”.
Some of the futurists and doomsday prophets mentioned in chapter four as the people most likely to warn us about the dangers of the impending Artificial Intelligence singularity, believe that we already live in a simulated reality. The main argument for this worldview is that since simulations and computer graphics seem to be getting better at an ever-accelerating rate, we can’t really know if we already live in a simulation or not. To put it another way, we simply have no way of knowing if we live in The Matrix or if our perceived reality is all there is. A really mind-blowing counterargument to this theory is that Bitcoin’s Proof of Work algorithm would eventually slow down the simulation since Proof of Work is verifiable and can’t be simulated itself. Computing power would have to be sacrificed by some entity somewhere, regardless. One question remains, though: can the inhabitants of a simulated reality actually feel or measure a slowdown of the very simulation they live in?
Footnotes:
1. Source: howmanyconfs.com
About the Bitcoin Infinity Academy
The Bitcoin Infinity Academy is an educational project built around Knut Svanholm’s books about Bitcoin and Austrian Economics. Each week, a whole chapter from one of the books is released for free on Highlighter, accompanied by a video in which Knut and Luke de Wolf discuss that chapter’s ideas. You can join the discussions by signing up for one of the courses on our Geyser page. Signed books, monthly calls, and lots of other benefits are also available.