You likely remember high school math and being told to “show our work.” It was not just that you had to get the right answer. You had to show the teacher that you understood the process. Who knew that, years later, you would be asked the same question about mining altcoins?
That is one of the fundamental underpinnings of how altcoins function. In order to mine, sell, or buy any altcoin, you need to show your work. It is called “proof of work” and understanding it is key to understanding the functions of altcoins.
Proof of work is simple to define. It is a really hard task to do, that is easy for somebody to verify once you have done it. Think of proof of work like a labor task around the house, like cleaning out a storage room or painting the house. It is hard and it takes hours and probably specialized tools, but once you are done, it is easy to see that the work is done. The house looks nice, you can see the floor of the room, and you get a few compliments.
The same principle applies to altcoins. Altcoins are built on the fundamental economic principle of scarcity; there are only so many of any altcoin, ever, in the world. Bitcoin, for example, is designed to allow only 21 million bitcoin to ever be mined. Once the last one is struck, that is it.
So how do you prevent crooks from forging altcoins? That is where proof of work comes into play. How?
Hash It Out
Altcoins do this with “hashes.” Think of hashes as one-way streets. It is very easy with a hash function to turn a number into another number, that is, to go down the street one way. But it is hard, in fact nearly impossible in most cases, to pull a u-turn and return to your original destination. If this sounds familiar, it is a common privacy feature under the hood of just about every website and commonly used application. Google hashes your passwords, Amazon hashes your email, and so on.
Altcoins take it one step further. They also include a “service string” that ties this particular set of hashes to a particular altcoin, so that the work cannot be recycled. Think of the service string like a car key; there are many cars almost exactly like yours, but it is the key that ultimately makes the difference.
The combination does not necessarily make altcoins impossible to forge, it should be noted. In theory, at least, if somebody wanted to build an enormous computer to do nothing but reverse-engineer an altcoin’s hashes, perhaps they could eventually pull that off. However, it requires so much energy and effort it is not worth doing. You would be better off, if you built this rig, to just mine altcoins instead!
Proof of work is what makes every altcoin unique and what gives it value. By doing the work, and proving that it is done, miners guarantee that every coin has value and that every transaction on the blockchain is, indeed, valid.