What is Proof of Work (PoW) in cryptocurrency?

Cryptocurrencies, like Bitcoin, are traded through the best cryptocurrency exchanges without the involvement of a central authority. But without a central authority to act as a final arbiter, how do you ensure that nobody manipulates the blockchain? One answer is using Proof of Work (PoW). 

What is Proof of Work?

PoW is a consensus mechanism used to confirm that network participants, called miners, calculate valid alphanumeric codes (hashes) to verify Bitcoin transactions and add the next block to the blockchain. 

Proof of Work is about creating a positive incentive for people to invest the resources necessary to add valid blocks to a cryptocurrency's blockchain.

"The challenge in a blockchain like Bitcoin is to maintain an agreed transaction record without having a central authority," says William J. Knottenbelt, a professor at Imperial College London's Department of Computing. "So the key question is how a group of peers of similar status can agree upon which of them should be authorized to add to the common transaction record."

PoW mining

Hashes are complex cryptographic puzzles for crypto miners to solve, also called Bitcoin mining. Mining enables them to add the next block to the blockchain and receive payment in the form of new digital coins and tokens.

Unlike gold miners, who use pickaxes to find precious metals, crypto miners use advanced computer systems to solve these complex puzzles and find cryptocurrency. 

"Proof of Work is how miners (block publishers) prove to the world that they have put in the necessary work to create a well-formed block of transactions to add to the blockchain," says Knottenbelt. "From the miner's perspective, they are turning the energy they put into the search for valid blocks (for which they typically purchase special high-performance hardware) into money."

The winning miner receives the reward only after the other systems in the network verify, through the Proof of Work protocol, that the solution is correct and valid.

PoW verification

Verification requires serious number crunching, and the equipment miners use must undergo much trial and error before finding the correct hash.

"Proof of work uses a lottery mechanism — miners create candidate blocks of transactions (including a reward for themselves) which must satisfy several strict conditions," Knottenbelt explains. "They then test to see if these conditions are fulfilled. Often, they are not, and the miner has to go back and try again."

It requires much work because most candidate blocks do not include the correct hash. To ensure that new blocks are produced at regular intervals, the difficulty of the PoW process can increase or decrease.

"The difficulty of the lottery is adjusted periodically so that if blocks are being produced too quickly, then it becomes harder to satisfy the conditions necessary for producing a valid block, and if the blocks are being produced too slowly, then it becomes easier," Knottenbelt says.

PoW reward

The parties verifying crypto transactions are strongly incentivized to add to its blockchain because publishing a valid block earns a reward for that blockchain's native currency. This can be quite valuable, depending on the blockchain. 

Bitcoin is the top-performing cryptocurrency in the world that uses Proof of Work. However, the reward for mining Bitcoin is halved every four years. Currently, the reward for mining one block of Bitcoin is 3.125 BTC. 

PoW security

Proof of Work arguably provides a higher level of security than other means of consensus, with Bitcoin running for over a decade without a significant outage or compromise. 

PoW enhances a blockchain's security by requiring significant time and money from miners and other network participants to authenticate transactions. This makes it increasingly less likely that someone would seek to undermine a cryptocurrency's blockchain. 

"Security-wise, Proof of Work has empirically been shown to work very well for more than 10 years," Knottenbelt says. "The jury is still out on Proof-of-Stake."

However, Proof of Work also requires a large amount of electricity. This is something critics of Bitcoin would argue produces too much of an environmental impact to justify its improved security compared to mechanisms such as Proof of Stake.

Where did proof of work come from?

While Proof of Work is most associated with Bitcoin, its sources trace back to 2008, when the pseudonymous Satoshi Nakamoto published the Bitcoin white paper. The concept has been around in the computing world since at least the early 1990s, and the term 'proof of work' is thought to have first surfaced in an article by computer scientists Ari Juels and Markus Jakobsson in 1999.

With bitcoin, Nakamoto based the cryptocurrency's proof of work mechanism largely on Hashcash, a denial-of-service countermeasure outlined by Adam Back in 1997. In particular, Nakamoto envisaged Proof of Work to ensure that it becomes exponentially difficult to attack the Bitcoin blockchain as more blocks are added to it.

Pros and cons of Proof of Work

Here are the advantages and disadvantages of PoW:

Pros of PoW

• Proven security and resilience
• Decentralized and resistant to censorship

Cons of PoW

• High energy consumption
• Slower transaction speeds cause scalability issues
• Potential risk of a single entity having majority control of the network hash rate (51% attacks)

How Proof of Work compares to Proof of Stake

While Proof of Work is popular, another consensus mechanism known as Proof of Stake is also widely used. Instead of verifying the amount of computational work done, proof of stake uses the cryptocurrency block publishers are willing to deposit as insurance against their misbehavior.

"Conceptually this is quite appealing because it short-cuts the step of having to invest in high-performance mining hardware and also the energy related to the use of that hardware," Knottenbelt says.

However, proponents of Proof of Work argue that Proof of Stake and other consensus mechanisms inevitably lend themselves to some form of centralization, precisely the thing Proof of Work was designed to avoid.

"Proof of Stake is fundamentally centralized," says Jimmy Song, a bitcoin author, educator, and developer. "There's no way to tell which to go with in case of a conflict." 

On the other hand, Proof of Work's major downside largely contributes to excessive energy consumption each year equivalent to the consumption of a nation the size of Thailand. It also produces a large amount of electronic waste in the form of mining units that are discarded for ever more powerful models.

Examples of cryptocurrencies using Proof of Work

While Bitcoin is the most popular cryptocurrency to use Proof of Work, other cryptocurrencies use it as well, such as:

• Litecoin
• Dogecoin
• Bitcoin Cash
• Zcash
• Siacoin
• Monero

Ethereum originally used Proof of Work but later transitioned to using Proof of Stake (PoS). 

FAQs about Proof of Work