Proof of Work (PoW) Explained

Proof of work is the mechanism that secures many cryptocurrency networks and prevents double-spending, which was the primary obstacle to feasible digital currencies. For a transaction to be confirmed, network validators must solve complicated mathematical problems that prove the legitimacy of the transaction. They are then rewarded for their work with cryptocurrency.

Overview for Fast-Readers 

  • Proof of work (PoW) was first conceived in 1993 as a method for preventing spam emails. The idea was that legitimate senders would gladly incur the cost of a small computation before sending an email, while this cost would make bulk spam emails prohibitively expensive
  • Proof of work found its most important application in 2008, with the release of Bitcoin’s whitepaper by the pseudonymous Satoshi Nakamoto
  • Bitcoin’s decentralization and security relies on the economic incentives that Proof of Work promotes. Thanks to PoW, Bitcoin has processed transactions worth trillions of dollars without ever being compromised

What is Proof of Work (PoW) in Cryptocurrencies?

At its simplest, Proof of Work is a method of determining which transactions in a payment network are legitimate, discarding illegitimate transactions, and sharing the results with the rest of the network. PoW is called a consensus mechanism or consensus algorithm, which refers to its mathematical approach to achieving agreement in an environment where there may be sizable incentives for dishonesty.

To understand Proof of Work, let’s start by defining the problem it’s intended to solve: double-spending. This is the digital equivalent of counterfeiting cash, or spending the same dollar bill at two different stores. When dealing with a completely digital asset such as Bitcoin, what’s stopping you from copy-pasting the coins you own and spending them wherever you like?

Bitcoin solves this problem via an ingenious application of Proof of Work. Network validators, called miners, must complete mathematical puzzles whose solution proves that transactions are legitimate, i.e. the spender actually owns the coins they are spending. This problem must be solved before a transaction can be confirmed.

What Does PoW Have to Do With Blockchain?

While Proof of Work was created fifteen years before blockchain, its major application is now in securing blockchain networks. Bitcoin relies on PoW, as do its forks and derivatives, and many other blockchains such as Ethereum.

How Does PoW Work?

Proof of Work explained infographic

A blockchain is a record – often called a ledger – of every single transaction ever performed on that network. When you make a transaction, miners must check the ledger to verify that you are the legitimate owner of the funds you are trying to spend.

The exact work that miners do relies on cryptographic hash functions. Hash functions are mathematical equations that turn any input into an output that conforms to certain rules.

Bitcoin applies these hash functions in a number of ways. One application makes the task of comparing transactions against the whole history of the ledger feasible within the 10 minute block time.

Instead of checking every single entry since Bitcoin’s inception, all a miner needs to use is a specific piece of information – the block header hash – included in the previous block. This hash in turn refers to the previous block, which refers to the one before it, and so on. These hashes are the links that form the blockchain and guarantee its integrity.

Advantages of Proof of Work

When implemented on a wide enough scale, PoW is incredibly secure. Its simplicity gives it strength, and there is a beauty to the game theoretic incentives it provides for honest work.

In order to compromise a PoW network, you would need to control a majority of its computational power. This is called a 51% attack. As more and more computational power is added to the network every day, this becomes more and more difficult.

Disadvantages of Proof of Work

As mentioned before, to successfully attack a PoW network you would need to control at least 51% of its computational power. This is very unlikely on a widely decentralized network like Bitcoin, but is much more feasible on smaller networks. 51% attacks can and do happen to weaker networks.

Another feature of PoW networks is that they require a lot of energy to maintain. Mining farms run hundreds or thousands of specialized mining devices, each of which consumes about as much electricity as a household espresso machine.

This means that energy costs and reliability play an important role in the economics of Bitcoin. It’s no surprise, then, that a majority of Bitcoin mining farms are located in areas with cheap, clean, and abundant hydroelectric power.

Why is Proof of Work So Secure?

The main feature that makes Proof of Work so secure is its objectivity. The network responds in predictable, deterministic ways when certain events occur. For example, if the blockchain splits – which sometimes happens when competing blocks are processed simultaneously – the winner is the chain which has had the most work performed on it.

PoW also ensures that the blockchain is strengthened as time passes. In order to undo a previous transaction, a miner must expend all the computational energy that it took to mine every block since that particular transaction. The further back the transaction, the more impossible this becomes.

Other Consensus Mechanisms

Proof of Stake

Proof of Stake (PoS) is the most developed alternative to PoW. Whereas in PoW miners compete against each other to be the first to solve each block’s puzzle, in PoS the creator of each block is chosen according to the amount of cryptocurrency that they stake, i.e. post as collateral.

PoS requires miners to hold an amount of the cryptocurrency on whose network they are acting as a validator, thus having a vested interest in the continued value of the network. This differs from PoW, as there is no requirement that Bitcoin miners hold any Bitcoin.

Ethereum will transition from a PoW to PoS consensus mechanism with the release of Ethereum 2.0 in the next couple of years.

Proof of Burn

Proof of Burn is a theoretical method for achieving distributed consensus. It aims to address potential shortcomings in Proof of Stake.

Proof of Burn (like Proof of Work) relies on the idea that there is no such thing as a free lunch. In order to be rewarded with valuable cryptocurrency, a miner must actually perform work. Work incurs a cost. In PoW, this is the cost of electricity and the cost of the physical mining rigs. Yet in Proof of Stake, there is no adversarial competition required; validators are simply chosen according to a deterministic function.

Proof of Burn requires miners to burn (irretrievably send to an unspendable address) an amount of cryptocurrency before they can earn the block reward. This introduces a real cost to their operation and is intended to disincentivize bad actors.

Conclusion

Proof of Work is an elegant method of achieving consensus in an environment where there are otherwise very few incentives for honesty. It has secured the Bitcoin network for over a decade and is only getting stronger by the day with the addition of more computational power, distinguishing it from nascent alternatives such as Proof of Stake.

While PoW does incur high costs for miners, this is the work that needs to be done in order to produce something of value. Large energy expenditures and the often redundant work involved in mining blocks are not shortcomings of PoW, they are features that lend it its strength.