What is Proof of Work (PoW)?

Publish Date 28 Apr 2022
Blockchain / 5 Min Read
Alex Lielacher / Last Update 28 Apr 2022

Proof of work is a distributed consensus protocol that powers cryptocurrencies like Bitcoin.

When most people think of blockchain technology, the first thing that comes to mind is cryptocurrency. And while it's true that Bitcoin and other digital currencies are based on blockchain technology, there's much more to it than that.

Proof of Work (PoW) is one of the essential concepts in understanding cryptocurrency. It's what makes Bitcoin, Litecoin, and other digital currencies possible.

Read on to learn about proof of work (PoW), how it works, and how it differs from other leading consensus protocols.

Table of contents

What is proof of work?

Proof of work (PoW) is a protocol that enables a blockchain network to reach a distributed consensus on the validity of transactions.  

Proof of work was first proposed by Satoshi Nakamoto, the pseudonymous creator of Bitcoin, who stated in the Bitcoin whitepaper:

“We propose a solution to the double-spending problem using a peer-to-peer network. The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work.”

Double-spending is a challenge for digital money as - in theory - copies can be made and spent twice. To address this issue, proof of work acts to prevent double-spending of digital currencies, thereby securing blockchains from manipulations or attacks.

Proof of work is used to confirm on-chain transactions and produce new blocks in a blockchain. Transactions are processed by special nodes commonly known as miners, who compete to verify transactions in a network and get rewarded if they are successful.

The proof of work algorithm is responsible for setting the difficulty rate and work that miners perform. Crypto mining is the “work” that ensures only valid blocks are added to the chain.

How does proof of work work?

Proof of work is a necessary part of adding new blocks to a crypto network. In PoW cryptocurrencies, transactions are processed into blocks. Each block contains a block difficulty, a hash function, and a nonce. The hash is a representation of the block data and is directly related to proof-of-work. 

To find the winning proof of work miners, they must solve highly complex problems and earn the right to mine a block on the blockchain. In other words, the ‘work’ is solving the mathematical problem, and the ‘proof’ is the solution to the problem.

Miners rely on specialised mining hardware to run the computations needed to solve the puzzle and earn the right to verify the next block of cryptocurrency transactions. 

During the computation, miners produce a so-called ‘hash’ which converts input into a random phrase of letters and numbers. Miners must create a hash matching the cryptocurrency’s current target nonce.

Whoever achieves the objective first gets to process the batch of transactions, add a new block to the chain, and mint new digital currency.

In short, here are the steps showing how proof of work works:

  1. Cryptocurrency transactions are pooled into a block.
  2. Crypto miners compete based on computing power to be the first to solve a complex math puzzle. Showing proof of solving this PoW problem gives the miner the right to process the block of transactions. 
  3. The miner who succeeds will process the block of transactions and add a new block to the crypto network. 
  4. The new block is distributed to all nodes on the network who all maintain a copy of the blockchain.

Proof of work example

Proof of work example

The Ethereum network is one of the largest crypto networks using proof-of-work. In this scenario, the Ethereum proof of work protocol, Ethash, requires miners to run computations to find the nonce of a block. Only blocks with a valid nonce can be input onto the network. 

When competing to produce a block, a miner will repeatedly put a dataset through a mathematical function. The miner can obtain the dataset by downloading and running an Ethereum client. The dataset is used to generate a mixHash below a target nonce, as determined by the block difficulty.

The hash target is dictated by the difficulty rate. The lower the target, the minor the set of valid hashes. The generated hash is open for miners and clients to verify. This means even if a single transaction were to change the hash would make it easy to spot the fraud.

Here is an example of a hash for the block #733739, mined on April 27th 2022.

00000000000000000007997829ae5d953c5ede09646b5e6e3161d8b2d09a10cc

Is proof of work safe?

The goal of proof of work is to secure crypto networks. PoW networks work to incentivise miners and ensure the nodes that control the majority of computing power produce the longest or “heaviest” chain.

Remember, blockchains rely on having a single source of truth. For this reason, there is little incentive for a subset of miners to start their chain.

In a PoW system, the longest chain is considered the most valid since it has had the most computation work done. This makes it almost impossible to erase transactions or manipulate transactions. 

To alter transactions, malicious actors will have to control 51% of the network computing power. To achieve this, they will need considerable computing resources and collusion between nodes, which, even under the right circumstances, consumes more energy and resources than any potential gains.

Why do cryptocurrencies need proof of work?

Proof of work is important because it prevents double-spending. If users were able to spend their cryptocurrency more than once, it would effectively cripple digital currencies.

As we have observed, PoW is essential to securing transactions and adding only valid blocks to the network. Most importantly, proof of work is responsible for issuing new cryptocurrency into a network by incentivising miners to find new blocks to secure the chain. 

Currently, the Bitcoin blockchain rewards a miner who successfully creates a block with 6.25 BTC. Miners who succeed in creating a block in the Ethereum blockchain are rewarded with two freshly minted ETH, and all the transaction fees contained within the block.

A miner may also be rewarded 1.75 ETH for creating an uncle block. This is a valid block created by a miner practically at the same time as a successful block is mined. This usually happens due to network latency issues.

Does Bitcoin use proof of work?

Bitcoin is the most famous application of proof-of-work. 

It was Bitcoin that laid the foundation for PoW consensus algorithms. The mathematical puzzle is hashcash. The Bitcoin network uses the SHA-256 algorithm to generate a hash for the block. The average block generation time is ten minutes.

Which other cryptocurrencies use proof of work?

Here is a list of popular cryptocurrencies using proof of work, although some are experimenting with other ways of securing their networks.

  • Bitcoin
  • Ethereum
  • Litecoin
  • Bitcoin Cash
  • Monero

What's the difference between PoW and PoS?

You may have come across proof of stake (PoS), which is the consensus mechanism that powers many newer blockchain networks. Below is the comparison of PoW and PoS:

  Proof of Work Proof of Stake
Validation method Miners use computing power to compete for block verification. Whoever solves the puzzle first wins the block and earns the reward. An algorithm selects a network of validators to verify blocks according to cryptocurrency holdings (stakes). Users have rewarded cryptocurrency in proportion to their stakes.
Consensus Focuses on computational power to solve the PoW problem and secure the network. Focus on staked crypto to secure the network and reward validators.
Accessibility Even without a cryptocurrency balance, you can use your computing power to follow the proof of work protocol. You need to have a crypto balance for you to participate in staking.
Finality The majority of the nodes in a network have to agree for a transaction to be valid. At certain points should ⅔ of validators agree on the state of the block, it is considered final.

Proof of work vs proof of stake

Pros and cons of proof of work

Proof of work is a profound innovation that has been integral in the development of Bitcoin and other cryptocurrencies that follows. However, PoW has benefits as well as drawbacks.

Pros

  • Miners can earn cryptocurrency by successfully validating new blocks of crypto transactions. 
  • You don’t need to have crypto to get started and earn block rewards.
  • The computing resources required by PoW cryptocurrencies make them secure since it takes more than half of the blockchain’s computing power to manipulate the network. As a result, proof of work tends to promote decentralisation (as opposed to proof of stake, which can lead to centralisation among the “rich”).

Cons

  • Proof of work requires miners to use expensive mining hardware to compete, making the mining process costly.
  • Due to increased computation requirements, a handful of mining farms may potentially dominate, leading to centralisation of mining. 
  • The high energy consumption of proof of work networks is a cause for concern among environmentalists.

Further reading

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We hope that this guide on proof of work helps traders understand more about the cryptocurrencies they're investing in. Keep up to date on evolving blockchain trends here!



Alex Lielacher

Cryptocurrency Content Contributor

Alex Lielacher is a ‘banker-turned-bitcoiner’ who exchanged the bond trading desk for a laptop in a co-working space to provide engaging and educational content for leading companies in the blockchain technology space.

 

 

The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.

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