Proof Of Work

Updated on January 5, 2024
Article byRutan Bhattacharyya
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Proof Of Work (PoW)?

Proof of work or PoW is a blockchain consensus mechanism that involves utilizing computing power to complete the verification of cryptocurrency transactions before adding them as a new block in the blockchain. The decentralized networks utilized by cryptocurrencies employ this mechanism to ensure the new data’s integrity.

Proof Of Work

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PoW enables selecting which of the miners or participants can manage the lucrative task that involves the verification of new data. PoW establishes the basis of different cryptocurrencies, which allows for secure consensus. It is a robust, proven way to ensure a decentralized blockchain remains secure. Besides Bitcoin, some cryptocurrencies using this mechanism are Litecoin and Dogecoin.

Key Takeaways

  • The Proof of work refers to a technique used in cryptocurrencies to verify if the new transactions added to a blockchain network are accurate. It ensures the integrity of the new data added to the blockchain network.
  • A key difference between proof of stake and proof of work is that the former uses substantial energy and computational power while the latter uses less computational power and energy.
  • There are various key advantages of proof of work in blockchain. For example, it provides security and transaction. Moreover, it removes the chances of network manipulation.

How Does Proof Of Work In Blockchain Work?

The Proof of Work refers to a software algorithm that cryptocurrencies use to ensure that blocks are deemed valid only if they require a specific level of computational power for production. The main objective of this mechanism is to maintain the security and integrity of every transaction in the blockchain network.  

With cryptocurrencies utilizing the PoW mechanism, every transaction block has a particular hash. To confirm a block, crypto miners must create a target hash equal to or less than that block. Miners utilize mining devices that can quickly generate computations to achieve this. Their objective is to become the first miner having the target hash, as only that miner can make changes to the blockchain and get cryptocurrency rewards.  

This mechanism works fine in cryptocurrencies because discovering the target hash can be challenging but verifying the same is not. The procedure is challenging enough to prevent someone from manipulating the transaction records. That said, after finding the target hash, miners find it straightforward to check it.

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Proof Of Work And Mining

In the case of cryptocurrencies, there aren’t any financial institutions or bankers one can trust. Instead, PoW and miners guarantee accurate and transparent transactions. For blockchains utilizing PoW, miners are the facilitators and guardians, making the system operate accurately and smoothly.

This blockchain consensus mechanism necessitates miners to utilize computing resources. Let us find out how it works.

  • The Grouping Of New Transactions Takes Place: Users purchase and sell crypto assets, and the data related to such transactions are combined into a block.   
  • Miners Engage In Competition For Processing The New Block: The cryptocurrency miners compete against one another to become the first person to solve a complicated math problem. If they show proof of undertaking the computational work, they earn the right to process the transaction block.
  • The Selection Of A New Miner Takes Place For Adding The New Block: A degree of randomness is associated with determining which miner will earn the right to add the new block. The winner gets cryptocurrency coins as an award and connects a new block to the existing blockchain.  

One must note that since miners invest substantial resources to utilize the necessary computer equipment and cover the required energy costs, they have the motivation to validate the transactions accurately.

Examples

Let us look at a few examples to understand the concept better.

Example #1

Suppose David sends Sam $500 through a blockchain network. Once the former executes the transaction, nodes in the network check the transaction and verify if it is a new transaction utilizing the distributed ledger.

Once the verification process is over, the users ensure that David has not paid the same $500 simultaneously to other people (in a scenario where David has only $500 remaining in his account and tries to transfer it to multiple persons. In this part, PoW gets in. All blocks have a one-of-kind cryptographic puzzle. After the block storage makes it to the limit, it has to link with the previous block within that blockchain network.

One must note that a cryptographic puzzle safeguards each of the blocks. The nodes try to solve that puzzle, and the fastest one to do so receives the reward.

Example #2

Cryptocurrencies utilizing the proof of work mechanism dominated the gains in the last week of June 2023. Four of the top gainers were as follows:

  • Bitcoin Cash
  • Bitcoin Satoshi’s Vision
  • Litecoin
  • eCash

The gains might have resulted from the previous month’s elevated SEC or Securities and Exchange Commission activity against the blockchain space. It appears that the SEC is leaning harder on PoS cryptocurrencies. Besides this, the decreasing energy prices might have also played a key role in the PoW coin rally. Such blockchains use a significant amount of electricity to operate and secure their services.

Advantages And Disadvantages

Let us look at the benefits and limitations of proof of work in blockchain.

#1 – Advantages

  • This consensus mechanism offers transparency and security.
  • It eliminates the possibility of network manipulation, for example, double spending.
  • PoW ensures that adding a significant number of fake transactions to a blockchain network is practically impossible.
  • The blockchain enables everyone to take part in the network and get rewards for it. This feature provides users with the motivation to become a node after joining a network.
  • It promotes renewable energy sources’ adoption.  

#2 – Disadvantages

  • When a controlling entity owns at least 51% of a network’s nodes, it might corrupt the blockchain network by gaining most of the network.
  • The confirmation of transactions can take roughly 10-60 minutes and is thus not instantaneous. This is because mining and adding the transaction to the blockchain takes time.
  • Miners competing against one another consume high levels of computing power to find the correct solution to the complex math possible. This wastes precious resources, such as hardware, energy, and space.
  • Miners must check over various nonce values to determine the correct solution that can allow them to solve the puzzle and mine the block. This process can be time-consuming.
  • The centralization of mining operations may result in only a few entities having control over most of the cryptocurrency operations.
  • Lastly, PoW regulates new coin creation.

Proof Of Work vs Proof Of Stake

The key differences between proof of stake and proof of work are as follows:

  • In the case of PoW, miners who are part of the same network carry out the validation process. That said, in the case of PoS or proof of stake, participants offering ether as collateral conduct the validation.
  • In the PoW mechanism, transaction fees and rewards are paid in Bitcoin. PoS involves paying only ether for transaction fees.
  • PoW has a competitive nature. It involves the utilization of a lot of computational power and energy. On the other hand, PoS involves utilizing less energy and computational power.

Frequently Asked Questions (FAQs)

1. Is proof of work dead?

It is not dead, and it is not even dying. That said, one must note that it is moving slower. Moreover, it is inferior to the newer mechanisms available across multiple important aspects, such as efficiency, performance, and cost. These are sufficiently good reasons for mining operations to switch to another consensus mechanism.

2. Who invented proof of work?

Moni Naor and Cynthia Dwork published the idea of PoW for the first time in 1993. Later on, in 2008, Satoshi Nakamoto applied the concept to Bitcoin paper. The PoW term was first utilized by Ari Juels and Markus Jakobsson in 1999 in a publication.

3. How does proof of work prevent double spending?

Cryptocurrencies involve utilizing PoW for the creation of new blocks in a blockchain via a procedure known as mining. This establishes an ongoing transaction history that prevents double-spending.

4. Is Ethereum based on proof of work?

It used PoW until 2022. Now, it utilizes proof of stake.

This has been a guide to what is Proof Of Work. Here, we compare it with proof of stake, and explain its mining, examples, advantages, and disadvantages. You can learn more about it from the following articles –

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