Blockchain Evolution Part 1: Everything Started with PoW

Key Takaways

• PoW launched decentralized finance but shifted to PoS due to energy use and scalability issues.
• TON briefly used mining for token distribution but now relies on staking.
• PoS is preferred for its efficiency, predictability, and lower costs.

However TON mining has ended, but you can still earn rewards by staking with Tonstakers. Staking offers a secure and energy-efficient way to participate in the network.

The first blockchain — the Bitcoin network — was launched 15 years ago. Blockchains never stop evolving from that moment and many things have changed. The most noticeable change in blockchain technology was a shift from a Proof-of-Work to a Proof-of-Stake consensus algorithm and further modifications to make chains suit users’ needs.

In this feature, we will explain how the Proof-of-Work consensus algorithm works, why TON was a Proof-of-Work chain for a period of time, and why most modern chains decided to switch to Proof-of-Stake.

What is Decentralization?

Bitcoin creator Satoshi Nakamoto designed Bitcoin to be decentralized. Instead of using a single server controlled by one organization, Satoshi created a peer-to-peer system where all computers have even responsibilities and capabilities while doing the same job and securing the network.

Decentralization means the system is protected from most force majors and can’t be shut down easily. There is no main computer, organization, or person who controls everything. There’s no lever to pull to shut down the network. If one Bitcoin node goes down, the network won’t notice it, as there are hundreds more left. No one can hack the Bitcoin thanks to decentralization.

To achieve decentralization, a synchronization mechanism is needed to ensure that each node has the same information and makes the same decisions. In blockchains, this mechanism is called a consensus algorithm — a set of rules that makes the network consisting of thousands of independent computers work as a whole.

What is a Blockchain Consensus Algorithm

Imagine a group of friends may vote on what movie they will watch today: one or two persons propose the movie, and the rest vote for what they want. The consensus is reached when the majority agrees on one movie.

To achieve agreement, two conditions should be met:

• All participants have the same data and know what they are voting for.
• A threshold must be reached for the agreement to be counted as achieved.

In regular voting each participant’s vote is worth the same, so the threshold is obvious: it’s 50% + 1 vote. In blockchains with a Proof-of-Work consensus algorithm, it’s more complicated and tied to computing power: if 51% of the network’s computing power decides that the transaction is valid, the whole network has to agree with it and execute the transaction. On the other side, if 51% of the network agrees that a fraudulent transaction is valid, the honest minority has to agree with them too. This is called the 51% Attack which we’ll explain below.

How Proof-of-Work Blockchains Work

Each node in the PoW blockchain has to store a copy of the blockchain with all transactions. They use it to check if the users actually received the coins they are trying to spend now.

When running, each node receives incoming transactions of blockchain users to check their validity and share them with other nodes to validate them too.

At the same time, each node collects the received transactions into a block and tries to sign it to execute all transactions inside. To do so, a node has to guess a special number to sign the block with a cryptographic function and get the correct signature.

For creating a block, the node owner receives a significant reward: in Bitcoin, it is 3.125 BTC or $190,000. Guess the right number, receive a reward, and start again. This process of creating blocks and receiving rewards is often called mining, like Bitcoin mining, Litecoin mining, etc.

How Cryptocurrency Mining Works

Mining is in fact a guessing competition: whoever can guess numbers faster has a better chance to find the right one and secure the reward. Being fast requires having a fast computer, up to the point where big miners build giant facilities near electricity plants and run hundreds of specially designed mining computers called ASICs.

ASIC’s only purpose is to mine a designated Proof-of-Work cryptocurrency. They are very powerful: the latest Antminer S21 Hydro consumes 5.3 KWt of electricity per hour to guess 335 trillion numbers per second. The amount of numbers one ASIC can process in a second is called a hashrate.

There are two ways to mine cryptocurrencies:

• Solo mining — you buy ASICs and try to mine blocks only by yourself. If you get lucky, you might receive 3.125 BTC (~$180,000) for a mined Bitcoin block. Don’t get excited: in 2023 only three solo miners got lucky, and each time it made the headlines.
• Mining pools — you buy ASICs and join forces with other miners. Together, your hashrate will allow mining Bitcoin consistently, but all participants will share their rewards. There are a few popular mining pools like EMCD, Antpool, ViaBTC, and others, who are in this space for almost a decade.

Today, leading mining pools have evolved far beyond their original purpose of coin mining services. Most of them now offer their users a range of additional cryptocurrency tools, from wallets for asset storage to a variety of other products. A notable example is the EMCD mining pool, which has developed a comprehensive ecosystem of services over the past two years. This allows their users not only to mine crypto but also to store it in savings accounts, sell or buy it on a P2P marketplace, exchange it within the wallet for other coins, or withdraw to external wallets without any fees.

What is the 51% Attack?

As we said before, what the majority of votes (hashrate) calls the truth, becomes a truth for the whole blockchain network. In theory, if one miner or community gathers 51% of the network’s hashrate, it will be able to dictate what the truth is. For example, it could convince the whole network that a particular address has 1 million BTC or holds no BTC at all, or even stop the whole network by calling every transaction invalid.

In practice, Bitcoin has never suffered the 51% attack consequences. In 2014, the Ghash.io mining pool gathered 55% of Bitcoin hashrate but the participants behaved honestly and limited their computation power without harming the network. Can you imagine what could happen if they were dishonest? The Bitcoin and other cryptocurrencies would lose the community trust and valuation.

Bitcoin clone called Bitcoin Gold suffered a 51% attack in 2018. Attackers hijacked the network and used double spending to sell tokens over and over without actually transferring them out of their wallets. The attack resulted in $18 million in losses.

Verge blockchain was also hit with a 51% attack in 2018, but the attacker was creative. He started mining blocks every 2 seconds instead of every 30 seconds and collected mining rewards all the time.

And one time the 51% attack was used for good. In 2016, The DAO project on Ethereum was hacked for $60 million. Ethereum miners (Ethereum used Proof-of-Work till 2022) decided to revert the chain: together, they rewrote the hacker’s transactions and returned the tokens to users.

At the time of writing, a 51% attack on a major PoW blockchain looks impossible: it might cost $81 billion just to buy the equipment sufficient to hack Bitcoin.

What Benefits Proof-of-Work Have?

Proof-of-Work algorithm has some obvious benefits:

• A higher entry threshold: a potential miner has to invest thousands of dollars into ASICs plus pay for maintenance and electricity. At some point, it may be viewed as an advantage: a 51% attack requires hacker buying a lot of scarce equipment costing $81 billion to hack Bitcoin. To hack Ethereum on Proof-of-Stake the attackers will need to spend only $34 billion in ETH.
• A limited supply of most PoW coins: it positively affects their price. For example, there are only 21 million BTC to be mined. Every four years the block reward gets cut in half (it is called halving), which makes the coin scarcer and supports its price. In Proof-of-Stake networks, supply is often unlimited. The unlimited supply makes the price unpredictable and volatile.
• A fair token distribution system: in the early days of the new PoW chain launch when there are no ASICs for this particular chain, any person with a PC can mine it with some profits.

Can you Mine TON?

In 2020, TON had a legal dispute with the Securities and Exchanges Commission. SEC prohibited TON from selling the tokens and made Telegram withdraw from TON development.

After the SEC’s decision, the team created ~5 billion TON and distributed them fairly through mining. Developers placed 98.55% Toncoin in the Giver smart contract and allowed everyone to mine them, while the network was running on Proof-of-Stake algorithm. After the contract gave away all Toncoin, the mining ended.

The TON mining period is easy to spot on TON staking APY historical chart, as the miners earned billions % APY. When mining ended, APY started shifting down to one-digit numbers.

Now to earn TON rewards you don’t need ASICs, electricity, or any other resources. You just need to stake your Toncoin with Tonstakers and it will do everything for you.

Why Most Modern Chains Use Proof-of-Stake instead of Proof-of-Work

In September 2022, Ethereum, the second largest blockchain, switched from a Proof-of-Work to a Proof-of-Stake consensus algorithm that doesn’t employ mining. Why did the Ethereum Foundation decide to do so? There were a two main reasons:

• Proof-of-work cryptocurrency mining consumes a lot of electricity. Bitcoin network consumes as much as the whole Poland!
• Proof-of-Work consensus is less predictable in block creation. Bitcoin network’s target block time is 10 minutes — the time is set by mining difficulty, which depends on the total hashrate. Still, miners can guess the correct number and create the next block in a second or in an hour — unlike Proof-of-Stake, no one can predict the exact block creation time.
• Proof-of-Work has problems with scalability. Miners have to propagate created blocks to other miners which delays the moment the consensus is reached. PoW networks can’t confidently produce blocks once in a few seconds which limits the maximum throughput.

Conclusions

Cryptocurrencies became popular thanks to Proof-of-Work and mining. In the early days, everyone could run a Bitcoin node on their laptop and earn a few dollars a day. A few years later, when the BTC price went up to a few dollars, mining started transforming into an industry with specially crafted computers, mining pools, and competition for cheap electricity.

The Proof-of-Work algorithm became a proof of concept: it proved a decentralized financial system could exist and be profitable for infrastructure providers. Then, in the late 2010s, the Proof-of-Stake era began, and most chains shifted to staking, but this is the topic of our next article, which we will publish on our Telegram channel.