What Is Proof of Work (PoW)?
Proof of Work (PoW) is a foundational consensus mechanism in blockchain technology. It requires substantial computational effort to validate transactions, ensuring the security and integrity of the blockchain network without reliance on a trusted third party. Initially popularized by Bitcoin, PoW underpins many cryptocurrencies by facilitating secure peer-to-peer transaction processing.
Key Takeaways
Proof of work (PoW) is a consensus mechanism used by cryptocurrencies like Bitcoin to validate transactions and secure the blockchain.
Mining in PoW requires significant computational power to solve encryption puzzles, leading to high energy consumption.
Unlike proof of work, proof of stake uses staked cryptocurrency as collateral, requiring less energy and computational power.
The competitive nature of PoW mining has centralized power among large corporations due to its profitability and resource intensity.
Proof of work removes the need for trust in financial transactions by using a network to verify information, ensuring security and integrity.
How Proof of Work Validates Blockchain Transactions
In some blockchains, proof of work shows that a program completed the tasks needed to propose a new block. It is commonly called a consensus mechanism because, eventually, network consensus is reached after there is proof that the work was done honestly (in this case, "honestly" means there were no attempts to alter data).
Proof of work is provided by sending the information in a block through a hashing algorithm, then adjusting variable fields until a hexadecimal number is reached that has a lower value than the network's difficulty target. This serves as proof that the program expended the computational effort to "hash" the block until a solution was reached.
Achieving Blockchain Consensus With Proof of Work
Here's a brief overview of how the proof-of-work process happens on the Bitcoin blockchain.
First, the worker, which is called a miner, creates a temporary file (a block). If it wins the competition to solve for a winning hash, this file will be stored on the blockchain. The block has the four following fields:
Block size
Block header
Transaction counter
Transactions
The block header contains the following fields:
Software version
Previous block's hash
Merkle root
Timestamp
Difficulty target
Nonce
The mining program creates a block, adding the transactions it prioritizes to the transaction field. It continuously adjusts the nonce and the extra nonce (which is part of the coinbase transaction in the Merkle tree) and sends the information in the block through a hashing algorithm.
The process repeats until a solution is found—a value equal to or less than the difficulty target. The difficulty target is set so that a certain number of hashes per second must be attempted before a solution is found. For example, on May 17, 2024, block 843,900 had a difficulty target of 83.148T, or 83.148 trillion attempts per second per miner.
The winning hash for that block was:
000000000000000000033028b3c8296ed776653032030cd01290f4345f5a9b6e
This hash provided proof to the network that the miner did the work. The block was added to the blockchain, and the network began its process of reaching consensus.
Consensus
Consensus, a state of agreement throughout the blockchain network, happens after a block is closed and added to the chain. While working on proposing new blocks and generating winning hashes, each miner also validates each new block as it is added. Each miner broadcasts to the network that the block it confirmed is valid.
New blocks use the previous block's header hash to make a chain of proof, leading to network consensus. This is why these proofs are called consensus mechanisms—because they form the basis of how consensus is reached.
Comparing Proof of Work and Proof of Stake: Key Differences
The two most popular consensus mechanisms are proof of work and proof of stake. Bitcoin's top competitor, Ethereum, used proof of work on its blockchain until September 2022, when its highly anticipated transition to proof of stake was made. Here are some of the key differences between the two.
Proof of Work
Validation is done by a network of miners
Bitcoin paid as a reward and for transaction fees
Competitive nature uses lots of energy and computational power
Proof of Stake
Validation is done by participants who offer ether as collateral
Ether is paid for transaction fees only
Less computational power and energy used
Consensus is reached faster because there is no difficulty
Considerations for Proof of Work Mining
Proof of work mining is competitive, with many trying to earn a profit. Because minable cryptocurrency has market value, businesses have emerged and overtaken most of the computational power used by proof of work blockchains.
For example, on May 17, 2024, FoundryDigital had the most hashing power on Bitcoin, 175 EH/s out of 673 EH/s total.1 Foundry Digital is owned by Digital Currency Group, a venture firm that has funded or invested in hundreds of cryptocurrency projects.2
Bitcoin and other proof of work cryptocurrencies were originally designed for individual use and hosting. However, individuals have been pushed out of the processes by businesses that have centralized them for profit.
What Is the Difference Between Proof of Work and Proof of Stake?
PoW requires nodes on a network to provide evidence that they have expended computational power (i.e., work) to achieve consensus in a decentralized manner and to prevent bad actors from overtaking the network. Proof of stake requires collateral in the form of staked cryptocurrency to become a trusted participant.
What Is an Example of Proof of Work in a Blockchain?
Bitcoin Cash and Litecoin both use proof of work as consensus mechanisms.
Why Do You Need Proof of Work?
Current financial systems are built around a need for trust. But when it comes to finances, it has been the case time and again that some people cannot be trusted to do the right thing. A proof removes the need to trust that others are acting honestly because it is code. Code is not tempted by money, so if it is written with good intentions and cannot be altered, it can replace our need to trust people we don't know.
The Bottom Line
Proof of work (PoW) is an essential blockchain consensus mechanism that validates transactions and secures the network through a decentralized process. It requires miners to solve encryption puzzles, which ensures secure peer-to-peer transactions. While PoW can enable robust security, it also demands substantial energy and computational resources in certain circumstances, emphasizing the importance of understanding its environmental implications. As seen with cryptocurrencies like Bitcoin, PoW fosters a competitive mining environment, providing rewards and transaction fees to participants for their computational efforts.
