The Proof of Work (PoW) system deters frivolous and malicious uses of computing power by requiring an amount of work that’s not insignificant but feasible, such as sending spam emails or launching denial-of-service attacks. The idea of “reusable proof of work” was adopted and used as a way to secure digital money by Hal Finney in 2004 using the SHA-256 algorithm.

Proof of Work

To be more precise, proof-of-work solves the “double spending problem,” which is more challenging without someone in command or a leader. The more coins users can double-spend, the greater the overall supply, causing the currency to become unpredictable and worthless.

Double-spending is common in digital transactions due to their ease of replication. This is why sending an email to multiple recipients is so easy.

The proof-of-work requirement makes doubling digital money difficult. Essentially, it’s “proof” that someone has made an extensive amount of computations.

How proof-of-work works

Blockchains, like Bitcoin, are shared ledgers that contain a history of every transaction ever made with the cryptocurrency. As its name indicates, this blockchain consists of blocks. The most recent transactions are stored in each block.

The Bitcoin blockchain can be extended by adding blocks with proof-of-work. In the ecosystem, miners trigger the creation of blocks by executing proof-of-work. Every time a miner generates a successful proof-of-work, a new block is accepted by the network.

The finding of the winning proof-of-work is so difficult that only expensive, specialized computers can perform the work required by miners. If a matching computation is guessed correctly, miners are rewarded with bitcoin. It is likely that they will earn more bitcoin the more computations they perform.

How exactly do the miners compute? In Bitcoin, the miners emit a string of random letters and numbers called a “hash.”

It is the miners’ job to solve the current puzzle, creating a hash with enough zeroes to match the current “target.” The probability of getting multiple zeroes in a row is extremely low. It takes, on average, about 10 minutes to reach this target with miners across the world making trillions of such computations a second.

As soon as a new Bitcoin value is created, miners have to hash it, and the race to find the winning proof-of-work begins again. A batch of bitcoin cryptocurrency will be awarded to the first person who reaches the goal first. A new value is created by the Bitcoin protocol, and miners must hash that new value in order to find the winning proof-of-work.

Proof of Work FAQs

What Does Proof of Work Mean?

To achieve consensus in a decentralized manner, PoW requires nodes to show that they have utilized computational power (i.e. work) by submitting evidence of their actions.

What Is Proof of Work and How Does it Validate Crypto Transactions?

There is no set pattern to the work. In the case of Bitcoin, SHA-256 is used for the hashing algorithm. Upon winning a round of hashing, the winner records transactions into the next block. This system incentivizes everyone on the network to act honestly and record only true transactions because the “winner” is a random selection proportional to the work done.

Why do miners follow the rules?

For every block for which they find the solution, miners earn bitcoin rewards. It’s for this reason that they go to mines.

The monetary reward also encourages them to follow regulations – not double-dipping. For instance, if the miner submits a solution and the Bitcoin network rejects it, the miner will lose the coins he/she would have been awarded. The fear of losing their hard work crypto coins makes them honor rules and regulations.

Why Do Cryptocurrencies Need Proof of Work?

Blockchains such as cryptocurrency networks are decentralized and peer-to-peer by design, so they require a way to achieve both consensus and security. An example of such a method would be proving one’s work in a manner that makes the network too resource-intensive to overtake. It is also possible to use another proof mechanism that is less resource-intensive while retaining some of the flaws associated with proof of stake (PoS) and proof of burn. Data stored within the network would be vulnerable to theft or attack without a proof mechanism.

Does Bitcoin Use Proof of Work?

Absolutely. To verify and confirm transactions, as well as to issue new bitcoins, the PoW algorithm utilizes the SHA-256 hashing function.

Difference between Proof of Stake (PoS) and Proof of Work (PoW)?

In a Proof-of-Stake mechanism, nodes are assigned according to how many coins they hold to mine or validate block transactions. A wallet that holds more tokens is effectively granted more mining power. Although PoS is less resource-intensive, it is susceptible to 51% attacks in smaller altcoins and creates incentives for hoarding tokens instead of using them.

Why is proof-of-work required?

To avoid double-spending or printing extra coins that users had not earned, proof-of-work is implemented. Having coins that can be spent more than once effectively makes the currency worthless.

This problem is easily solved in most digital currencies. Banks, which manage the system, keep track of the amount of money each person has. 

What are the problems with proof-of-work?

Several problems arise from the proof-of-work:

  • The proof-of-work involved in Bitcoin consumes as much energy as all of Switzerland combined. As bitcoin mining becomes more popular, the energy required to mine bitcoin will increase, but some of that will be derived from renewable resources.
  • 51% strikes: If a mining entity is able to capture 51% of Bitcoin’s hash rate, it can temporarily flout the rules, doubling-spending coins and preventing transactions.
  • The centralization of mining involves creating a currency without relying on a single entity. Though the system is somewhat centralized in theory, only three mining pools control almost 50% of the computational power of Bitcoin in practice. However, developers are attempting to alleviate this problem at least in the short term.

Cryptocurrencies which employ proof-of-work?

Proof-of-Work is commonly used by cryptocurrencies, although some are exploring other methods. Proof-of-work is currently used by the most popular cryptocurrencies, including:

  • Bitcoin
  • Ethereum 
  • Bitcoin Cash
  • Litecoin
  • Monero

Key points to know

  • PoW (proof of work) is a decentralized consensus mechanism, which requires members of a computing network to solve arbitrary mathematical puzzles in order to prevent anybody from gaming the system.
  • For validating transactions and mining new tokens, proof of work is widely used in cryptocurrency mining.
  • Proof of work enables Bitcoin and other cryptocurrencies to be traded peer-to-peer safely and securely without the need for third-parties.
  • As more miners join the network, the energy required to prove work at scale only increases.
  • In lieu of proof of work, several novel consensus mechanisms have been created. Proof of stake (POS) is one of those mechanisms.

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