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What Is Proof-of-Work? Here's What You Need to Know

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Without proof-of-work (PoW), there'd probably be no such thing as cryptocurrency. Although many of today's developers are experimenting with new consensus mechanisms, PoW is the breakthrough that made Bitcoin possible. To this day, Bitcoin (BTC) and dozens of altcoins rely on the proof-of-work algorithm to secure their networks without needing a central authority.

To understand how Bitcoin works, you must first answer the question "What is proof-of-work?" Here we’ll tell you everything you need to know about how PoW operates to deeply understand crypto. 

What’s proof-of-work?

The idea of PoW was around before Bitcoin started, but it only gained mainstream attention after the pseudonymous Satoshi Nakamoto published the whitepaper "Bitcoin: A Peer-to-Peer Electronic Cash System" in 2008. Nakamoto proposed using cryptography and computational power to prove transactions without the need for a central bookkeeper. PoW ensures people participating in the Bitcoin network can feel confident everyone is on the same page. 

A major issue the PoW algorithm solved is known as the double-spend problem. Unlike fiat currencies, digital currencies can more easily be copied or manipulated by bad actors who want to spend "double" of what they have in their crypto wallet. While Bitcoin doesn't erase the possibility of a double-spending incident, it dramatically reduces the odds this will occur.

PoW requires that computers put in a high degree of hash power (i.e., work) to verify transactions on a payment ledger. This involves solving complex algorithmic puzzles. The computer that successfully solves this "puzzle" gets to create a new "block" containing about 2,700 transactions on the blockchain, which goes back to the first Bitcoin transaction (aka the genesis block). 

If someone were to try and add a malicious block to Bitcoin's blockchain, it would need to get confirmed by all network participants for the rest of Bitcoin's history. Unless someone has more than 50% of the hash power, all the other computers will unlikely confirm invalid transactions and thus without an individual or cartel with 50% hash power, the network will be secure. The larger the network, the harder it is to get 50% hash power.  

How does proof-of-work function?

You could think of PoW as a global computer competition. Everyone who lends computing power to a proof-of-work blockchain is competing to solve a difficult math puzzle to verify transactions by creating new blocks. But why would anyone want to spend their electricity on creating Bitcoin blocks? How does crypto mining work? In one word: incentives. 

Anyone who successfully solves the algorithmic puzzle receives transaction fees and a block reward, which is a predetermined amount of the native cryptocurrency like Bitcoin. In Bitcoin's case, this block reward began at 50 BTC per block, but it’s cut in half every four years so as to not over-inflate the currency.

To ensure consistency on the blockchain, PoW consensus mechanisms often have a built-in difficulty adjustment. At regular intervals, blockchains like Bitcoin will change the number of zeros computers need to guess at the start of a hash function to win the block reward. 

The more miners there are, the more complex the puzzle becomes. Conversely, when Bitcoin has a lower hash power, the difficulty decreases. These difficulty adjustments ensure new blocks will appear on the Bitcoin network every 10 minutes. 

In this consensus model, miners are disincentivized to create false transactions because they would need to maintain these false blocks for the rest of Bitcoin's history. The energy costs associated with a 51% attack become increasingly impractical as more companies and countries participate in the Bitcoin network. However, that doesn't mean a 51% attack is impossible on a PoW chain. Although Bitcoin hasn't suffered this attack, smaller tokens like Ethereum Classic have. The fewer people participate in a PoW chain, the greater the odds of a double-spend scenario.  

Proof-of-Work: Important features to note

Due to PoW’s historical connection to Bitcoin, it’ll always remain a crucial innovation in the history of cryptocurrency. However, not everyone in the crypto industry believes PoW is the ideal consensus mechanism. Here are a few significant benefits and risks associated with PoW blockchains. 

Proof-of-work is difficult to destroy

Even if most people stopped believing in a proof-of-work cryptocurrency, the odds it would "die" are unlikely. As long as one person on one computer wants to add blocks to a blockchain, the cryptocurrency would still be online. 

Proof-of-work needs strong hash power for optimal security 

While a PoW cryptocurrency can exist with just one computer, it wouldn't have phenomenal security with such low hash power. Investors are more likely to feel confident in a cryptocurrency that's backed by a significant number of computers globally. 

The more hash power a blockchain has, the lower the odds any one entity can control 51% of the network. There's less potential risk of centralization when more mining pools compete against each other.  

Proof-of-work remains the most battle-tested consensus mechanism 

A major reason Bitcoin remains the top cryptocurrency is its track record. Bitcoin was the first to prove PoW could create a secure peer-to-peer internet payment system. Since Bitcoin's inception, it hasn't experienced an outage or a hack. This long track record of success improves PoW's reputation as a battle-tested consensus mechanism. 

Proof-of-work has may slow networks as they scale 

Since there are no leaders on PoW chains like Bitcoin, reaching a consensus within the community is challenging. Unlike proof-of-stake (PoS) chains, network participants can't "vote" on proposals with their tokens. Also, since nobody hires new Bitcoin miners to join the network, it's difficult to predict where Bitcoin's hash power will come from at any given time. 

There are also concerns that the clunky algorithmic game model makes PoW chains slower. The 10-minute per Bitcoin block reward makes it impractical to use this currency in day-to-day settings. However, developers are working on ways to settle transactions on top of PoW chains. Notably, the Lightning Network is a sidechain on Bitcoin that allows people to send BTC faster and cheaper. 

Uncertain future once block rewards decrease

Will Bitcoin miners still feel motivated to create new blocks after the last Bitcoin enters circulation? Many developers are dubious whether Bitcoin's incentives mechanism will be attractive enough to encourage miners to continue running their computers once block rewards vanish.

It will take about 100 years before the last Bitcoin is mined, but future generations must rethink the incentive structure for PoW chains. There’ll still be BTC transaction fees, but it's unclear whether this will offset the electricity costs miners have to take on. If it doesn’t, as many PoS advocates believe, the network’s security won’t be large enough to keep assets on the network safe.

Proof-of-work requires vast amounts of energy 

Many activists are concerned that PoW blockchains are causing irreversible environmental damage. As Bitcoin's hash rate increases, so do its CO2 emissions. Bitcoin likely emits more than 21 million metric tons of CO2 every year and uses roughly 35 TWh of electricity annually. 

Although more Bitcoin miners are gravitating toward sustainable energy sources, enforcing environmental standards in a decentralized network is challenging. Also, as the Bitcoin blockchain grows, the hash power will likely rise. The more people contribute to PoW chains, the more energy is used. Some claim this is necessary and worth it to provide this new, better form of money. Others think this is needlessly wasteful than greener crypto alternatives. 

Proof-of-work vs. proof-of-stake: How they differ

Currently, PoS is the leading competitor to PoW. Instead of requiring "miners" to use computing power to create new blocks, PoS needs network participants to secure the blockchain by putting cryptocurrency "at stake." In other words, people who want to secure a PoS chain must lock the native currency into the blockchain. But why would someone do this? The answer is for staking rewards. PoS protocols randomly select someone staking tokens to "validate" a new block. For this service, the staker gets a percentage of transaction fees on the blockchain. 

The advantages of PoS include its speed, scalability, and sustainability. PoS chains use less energy or emit less CO2 than PoW. Also, decentralized governance makes it easier to reach a consensus on PoS chains. Often, people who stake their tokens on PoS chains get a vote on significant proposals. 

However, since PoS is relatively new, it's not as battle-tested as PoW chains. Critics also argue that PoS may be easier to corrupt with a 51% attack. Large staking pools could theoretically take over the voting rights on a PoS chain. Despite all these, PoS has proven to be the more popular choice among contemporary blockchain developers. 

Which cryptocurrencies are proof-of-work?

There are dozens of cryptocurrencies that use PoW consensus, but here are a few of the most influential: 

  1. Bitcoin: It's impossible to talk about PoW without mentioning Bitcoin. As the world's first and largest cryptocurrency, Bitcoin is the prime example. Although initially intended as a peer-to-peer payment system, it has evolved into "digital gold."  
  2. Ethereum: Ethereum's ether has been the second-largest crypto since its introduction in 2015. Unlike previous altcoins, Ethereum brought dozens of innovations to the blockchain space, like smart contracts, DeFi (decentralized finance), and NFTs (non-fungible tokens). However, it’s moving to a PoS consensus mechanism with its newest iteration Ethereum 2.0
  3. Dogecoin: Besides Bitcoin, Dogecoin may be the most widely known PoW cryptocurrency. Thanks largely to its celebrity cachet, this inflationary cryptocurrency became the top dog in "meme coins." To this day, Dogecoin doesn't have much utility besides tipping and as a playful joke. 

Wrapping up

As the basis of Bitcoin, PoW is a crucial aspect of cryptocurrency. Although many developers feel it's time to move on to PoS, there are still positives to the PoW model. Despite its scalability and sustainability issues, it remains the longest-running consensus mechanism in crypto. Some also claim PoW is more difficult to corrupt than PoS chains due to the high amount of energy required for a 51% attack. 

Whatever your stance on proof-of-work versus proof-of-stake, you can count on Worldcoin to cover essential topics in the crypto space. We’re a new company that aims to put a share of our crypto in the hands of every individual on the planet for free. We’re also airdropping free DAI to anyone who downloads our app. Subscribe to our blog to learn more about the crypto space.