What is ‘proof-of-work’ (PoW)?

Proof-of-work (PoW) is the backbone of the cryptocurrency industry, and although it may be a daunting concept for a newcomer, having an understanding of PoW can be incredibly useful. Without PoW, cryptocurrency and decentralization as we know it simply would not exist.

In a nutshell, PoW, which was popularized by Bitcoin — the original cryptocurrency — back in 2009, is a system for validating cryptocurrency transactions, and it relies on powerful computer hardware to solve complex cryptographic puzzles. It’s different to proof-of-stake (PoS), which instead relies on users “staking” their cryptocurrency tokens.

In this AAG Academy guide, we’ll look at how the proof-of-work model works, why it’s important, and how it differs from proof-of-stake.

How does the Proof-of-Work model work?

The proof-of-work (PoW) mechanism is a method of validating cryptocurrency transactions and adding them to a distributed ledger (the blockchain). When a transaction takes place, miners compete to validate it by solving complex cryptographic puzzles. Those who solve the puzzle first validate the transaction, which is written to a block and added to the blockchain.

In order to solve those puzzles and compete with other miners, however, substantial computing power or dedicated mining hardware is required — and even then, it’s not a speedy process. While some miners may be able to complete the process in 10 minutes if they have the best hardware available, it can take others miners a lot longer.

As a reward for their efforts, miners receive one new Bitcoin (BTC) for every transaction they validate. It sounds like an incredibly lucrative hobby when you consider one BTC is currently worth almost $20,000, but when you take into account the hardware required, the incredibly competitive nature of mining, and the increase in difficulty, it’s only worthwhile for a select few.

PoW and the blockchain is what allows cryptocurrency to be completely decentralized and so secure, and most cryptocurrency projects continue to use the PoW mechanism more than a decade after Bitcoin made its official debut. Many projects are now choosing PoS instead for its speed and efficiency advantages, but PoW is still far more widespread.

Examples of proof-of-work

As we mentioned above, one of the biggest and best-known examples of the proof-of-work mechanism is Bitcoin, so let’s look at how PoW works in this scenario. It starts when a new Bitcoin transaction takes place, which must be added to a block. This block must get its own “hash,” which is a long and unique string of digits — essentially a digital fingerprint. Creating this hash is what requires substantial computing power because it’s not a simple process.

Once a suitable hash is created, based on the conditions set by the blockchain, the block can be closed and added to the chain, at which point the transactions within it are validated. This process not only eliminates what we call double-spend, but it also ensures that all transactions are valid and makes Bitcoin and other cryptocurrencies incredibly secure.

Ethereum, the second-biggest blockchain in the industry, also uses PoW today, but it will soon transition to an entirely PoS system. Other PoW cryptocurrencies include Dogecoin, Litecoin, Monero, Dash, and many others also use PoW.

Advantages and disadvantages of proof-of-work

We’ve already touched on some of the advantages of proof-of-work, but let’s look at them in more detail. We’ll also cover some of the disadvantages.

Advantages of proof-of-work

One of the biggest advantages of proof-of-work is that it eliminates double-spend, which is when the same funds are spent more than once. This isn’t possible with traditional cash — you can’t spend the same $10 bill in two different stores — but it is a concern with digital currencies, which are essentially just pieces of data that could theoretically be duplicated.

Part of the PoW process is to ensure that users sending cryptocurrency have the funds in their wallet, and that the funds haven’t already been used. It makes digital currencies trackable so that we can see where they’re coming from and where they’re going, and it makes them secure. Without PoW and consensus, which helps prevent attackers from rewriting blocks for nefarious purposes, it would be difficult to maintain an ethical network.

PoW also enables decentralization by allowing the process of transaction validation to be shared among a large network of miners, rather than having to be carried out by a single, centralized system or organization. Like most things in cryptocurrency, however, PoW isn’t totally perfect, so there are some disadvantages we should take into account as well.

Disadvantages of proof-of-work

The most obvious downside to PoW is the resources it requires. As mining has become more difficult and more intensive over the years, it requires incredibly powerful hardware, which isn’t cheap to acquire or cheap to run. One of the biggest criticisms of cryptocurrency is the impact it has on the environment, and that’s simply because PoW requires so much energy.

PoW is also a lengthy process, as we mentioned above. It typically takes longer than 10 minutes to validate a single block of Bitcoin transactions, and when you consider that there are tens of thousands of them every day, that’s a lot of time spent Bitcoin mining. When you take all these things into account, you can see why it’s so difficult for newcomers — particularly those with limited budgets — to take part in Bitcoin mining.

Why do cryptocurrencies need proof-of-work?

Many of the advantages of proof-of-work, which we’ve outlined above, are exactly why cryptocurrencies need a consensus mechanism of this kind. It prevents double-spend, ensures the honest validation of cryptocurrency transactions, and helps make the blockchain a secure and honest system that cryptocurrency users can rely on.

PoW also negates the need for a centralized team or organization that can process digital currency transactions, allowing the entire industry to be decentralized. Without PoW and proof-of-stake (PoS), cryptocurrency simply wouldn’t be able to operate in the same way, and it may not have all the advantages we’ve become accustomed to from digital currencies.

References

• What Is Proof of Work (PoW)?
• Proof of Work VS Proof of Stake: Which One Is Better?
• What is Proof-of-Work
• Consensus Proof of Work, What is it?