What is Proof of Work (PoW)? New Premier Guide 2024
Proof of Work (PoW) is the first consensus mechanism to appear on the blockchain and is used by many public chains such as Bitcoin, Litecoin, Ethereum (which switched to PoS in 2022), and many others.
What is Proof of Work (PoW)?
Proof of Work (PoW) describes a consensus mechanism that requires a network of devices to perform a significant amount of computational work. Hal Finney adapted the concept of “reusable proof of work” using a 160-bit secure hash algorithm 1 (SHA-1) in 2004 to reimagine the concept of digital tokens.
Bitcoin, launched in 2009, became the first widely adopted application of Finney’s PoW concept (Finney was also the first recipient of a Bitcoin transaction). Proof of Work forms the basis for many other cryptocurrencies and enables secure consensus.
Key Points
- Proof of Work (PoW) is a decentralized consensus mechanism that requires network participants to expend energy to solve cryptographic hexadecimal numbers.
- Proof of Work, also known as mining, refers to earning rewards for completing work.
- Proof of Work allows for secure peer-to-peer transaction processing without the need for trusted third parties.
- Large-scale Proof of Work requires significant energy consumption, which only increases as more miners join the network.
Understanding Proof of Work (PoW)
This explanation will focus on the role Proof of Work plays in the Bitcoin network. Bitcoin is commonly referred to as a cryptocurrency; technically, it is a token—a representation of ownership of value on the Bitcoin blockchain. Ownership of tokens can be exchanged for equivalent items, much like giving someone a dollar for a piece of candy—they now own the dollar, and you own the candy.
Proof of Work (PoW) Blockchain
The blockchain is a distributed ledger that records all Bitcoin transactions, similar to entering transactions in a spreadsheet. Each block is like a cell. Information such as transaction amounts, wallet addresses, time, and date is recorded and encrypted into the block header— a hexadecimal number created through the blockchain’s hash function.
When creating a hash value, the hash value of each block will be used in the subsequent block. This creates an immutable chain of blocks, as information from each block is included in the hash of the latest block.
HASH Value
When a block is closed, the hash value must be verified before a new block can be opened. This is where Proof of Work comes in. The hash value is a 64-bit encrypted hexadecimal number. With modern technology, a large amount of data can be hashed in milliseconds. However, miners attempt to guess the hash value, which takes a long time computationally.
Mining is the process of validating transactions and earning rewards by solving hash values.
Random Number
The hash value includes a series of numbers called a nonce, which stands for “number used once.” When a miner (a program on a node used to solve hash values) starts mining, it uses a nonce of zero to generate the hash value from publicly available information.
Solving the Hash Problem
If the hash value is lower than the current network target, the miner has successfully solved the hash value. The network target is the mathematical result converted into a hexadecimal number that determines mining difficulty.
If the hash value is greater than the target value, the mining program increments the nonce by 1 and generates the hash value again. Miners across the entire network attempt to solve the hash problem in this manner. Miners who solve hash values on the Bitcoin blockchain receive rewards for the current work completed.
Proof of Work vs. Proof of Stake
The two most popular consensus mechanisms are Proof of Work and Proof of Stake. Bitcoin’s main competitor, Ethereum, had been using Proof of Work on its blockchain until September 2022 when it transitioned to Proof of Stake. Here are some key differences between the two:
| Proof of Work | Proof of Stake |
| Verification is done by the miner network | Verification is done by participants who provide Ether as collateral |
| Bitcoin rewards miners with both block rewards and transaction fees | Ether is only used for paying transaction fees |
| Competitive and requires significant energy and computational power | Requires less computational power and energy |
Considerations
Mining is a competitive process, making it a competition among those with the strongest computational power. Therefore, miners join mining pools to increase their chances of receiving rewards since competitive computational work is required.
Proof of Work is also known for its energy consumption. Cambridge University tracks Bitcoin network energy consumption and uses “best guess estimates” to determine its usage. The energy used by the network is comparable to that of some small countries; however, it’s worth noting that the energy used by industrial data networks and data centers far exceeds that of the Bitcoin network.
Proof of Work is also a much slower validation method compared to others. For example, the number of transactions occurring exceeds the processing capacity of the Bitcoin network. Transactions sit in the mempool waiting to be validated, with average confirmation times between January 1 and February 9, 2023, ranging from 7 to 91 minutes (confirmation refers to the time your transaction is confirmed). The average block time for Bitcoin remains at 10 minutes, while the average block time for the Ethereum PoS network has been 12 seconds since September 2022.
Proof of Work Example
Proof of Work requires computers to randomly execute hash functions until they produce an output with the correct minimum number of leading zeros. For example, the hash value for Block #842,533 mined on May 8, 2024, is:
000000000000000000004f0f4988d6dee8c9d60100830d3d7633fffde5fdd986
The successfully hashed block reward is 3.125 BTC and 0.17220833 BTC in fees.
The nonce is 3,391,347,343, and there are 1,636 transactions in this block. Remember, the hash value is generated, and the nonce starts at zero, with this block being hashed 3.3 billion times by miners until a number below the target was achieved.
What Does Proof of Work (PoW) Mean?
PoW requires nodes on the network to provide evidence that they have expended computational power (i.e., work) in a decentralized manner to achieve consensus and prevent malicious actors from overtaking the network.
Why Do Cryptocurrencies Need Proof of Work?
Because networks like cryptocurrency blockchains are designed to be decentralized and peer-to-peer, some method is needed to achieve consensus and security. Proof of Work is a resource-intensive method that secures the network. There are also other, less resource-intensive proof mechanisms. Without a proof mechanism, the network and the data stored within it would be vulnerable to attacks or theft.
Does Bitcoin Use Proof of Work?
Yes. It uses a PoW algorithm based on the SHA-256 hash function to validate and confirm transactions and issue new bitcoins.
Bottom Line
Proof of Work is a consensus mechanism used by many cryptocurrencies to validate transactions on the blockchain and reward tokens for participating in the network. Proof of Work is a competitive process that attempts to generate a hexadecimal number below the network target using publicly available transaction information.
Under PoW consensus, thousands of mining programs work on a block until the hash value is solved, then move to the next block.