Introduction to Sia and Siacoin Part 7

Sia and Proof-of-Work.


The developers of Sia blockchain chose to use proof-of-work as an algorithm to seal the blocks of the Sia blockchain. With proof-of-work, miners on a blockchain network need to compute a nonce, which is short for number used once. Then, they use a combination of this number and data that they want to include into a block of the blockchain to generate a cryptography hash. If this hash corresponds to the current level of difficulty of the blockchain network, the miner or mining pool gets to create the block, include the data, the hash and the nonce and get the reward for creating the block. One of the properties of the cryptography hashes is their irreversibility, meaning that you can relatively easily create the hash for the data if you have the data, but if all you have if a hash, then it’s impossible to recreate the data.

Practically speaking, this means that hashes seal the data on blockchain networks. Anyone can verify that the hashes are true and the hash for a block becomes part of the next block. If someone were to change even one symbol in the information that a block of a blockchain contains, the information would produce a different hash and the block with the edited information would not fit into the blockchain.

The advantage of proof-of-work is that once a miner seals a block, transactions become immutable because if someone were to try and edit the transactions from the past, they would need more computational power than the rest of the network combined. This is because they would not only need to recreate the block where they would make editions, but they would need to recreate the entire blockchain, which could be possible theoretically, but is not currently possible practically.

Another popular algorithm to create blocks of blockchains is proof-of-stake. Neither Sia nor Bitcoin use proof-of-stake. The abbreviation for proof-of-stake is PoS, the same as for Proof-of-Storage, which is a mechanism that Sia uses to have storage providers upload chunks of files they are storing as proof of storage, hence the name of the mechanism. People not familiar with how Sia operates sometimes confuse one PoS with another PoS.

Proof-of-stake works very differently from proof-of-work. In proof-of-stake, miners get to create blocks of blockchain based on the number of coins (or stakes defined otherwise) that they are holding in their wallets or accounts. The more coins an entity holds, the higher the changes that the entity will get to create a block of a proof-of-stake blockchain and win the award for the block. The logic behind this algorithm is simple: the more coins someone has, the more they are interested in the network functioning in the way it is supposed to function.

The biggest problem and issue with proof-of-stake is that one party could accumulate a significant number of coins and potentially overtake a network that uses proof-of-stake, which is not possible with proof-of-work, where the computational power matters most.

Proof-of-work is about two resources: mining hardware that miners need to get and electricity. Practically speaking, both of these are variables. With electricity, costs of electricity can go up and down. Today electricity can be cheaper in one country or part of a country and tomorrow it can be cheaper elsewhere in the world, meaning that miners would have an incentive to mine in the new location because of savings.

The same happens with hardware. Technology gets better every day and tomorrow a new manufacturer can introduce new hardware that will give new miners on a proof-of-work network an advantage over old miners.

As such, the mining power on a proof-of-work network can shift over time and simple accumulation of coins will not allow someone take control over the network.