Understanding Proof of Work – Forbes Advisor


Editorial Note: We earn a commission on partner links on Forbes Advisor. Commissions do not affect the opinions or ratings of our editors.

Proof of work is a technique used by cryptocurrencies to verify the accuracy of new transactions that are added to a blockchain. The decentralized networks used by cryptocurrencies and other defi applications have no central governance authority, so they use proof of work to ensure the integrity of new data.

What is proof of work?

Cryptocurrencies do not have centralized gatekeepers to verify the accuracy of new transactions and data that are added to the blockchain. Instead, they rely on a distributed network of participants to validate incoming transactions and add them as new blocks on the chain.

Proof of work is a consensus mechanism for choosing which of these network participants, called miners, are allowed to handle the lucrative task of verifying new data. It is lucrative because miners are rewarded with new crypto when they accurately validate new data and do not cheat the system.

“Proof of work is a software algorithm used by Bitcoin and other blockchains to ensure that blocks are only considered valid if they require a certain amount of computing power to be produced,” says crypto founder Amaury Sechet. -eCash currency. “It’s a consensus mechanism that allows anonymous entities in decentralized networks to trust each other.”

The “work” in proof-of-work is essential: the system forces miners to compete with each other to be the first to solve arbitrary mathematical puzzles in order to prevent anyone from messing with the system. The winner of this race is selected to add the last batch of data or transactions to the blockchain.

Winning miners only receive their new cryptocurrency reward after other network participants have verified that the data added to the chain is correct and valid.

Why is proof of work important?

The first cryptocurrency, Bitcoin, was created by Satoshi Nakamoto in 2008. Nakamoto published a famous white paper describing a digital currency based on proof-of-work protocols that would enable secure peer-to-peer transactions without the intervention of a centralized authority.

One of the problems that had hindered the development of an effective digital currency in the past was called the double-spending problem. Cryptocurrency is just data, so there needs to be a mechanism to prevent users from spending the same units in different places before the system can record transactions.

While you’d be hard-pressed to spend the same dollar bill on two separate purchases, anyone who’s copied and pasted a computer file duplicated can probably imagine how you could spend digital cash twice, or even ten times or more. .

Nakamoto’s consensus mechanism solved the problem of double spending. By incentivizing miners to verify the integrity of new crypto transactions before adding them to the distributed ledger that is the blockchain, proof-of-work helps prevent double-spending.

Proof of work and mining

Let’s take a typical bank account. If you deposit a check into your savings account, how do you know you will be credited with the correct amount? How can the writer of the check be sure that he will only be debited the amount he wrote on the check? The value of a bank is that all parties to a transaction trust the bank to move money with precision.

With cryptocurrencies, there are no bankers or financial institutions to provide trust. Instead, miners and proof-of-work ensure transparent and accurate transactions. For blockchains that use proof of work, miners are the gatekeepers and enablers that keep the system running smoothly and accurately.

A proof-of-work mechanism forces miners to use computing resources for the privilege. This is how it works:

  • New transactions are grouped together. Users buy and sell cryptocurrencies, and the data from these transactions is aggregated into a block.
  • Miners compete with each other to process the new block. Crypto miners compete to be the first to solve a complex mathematical problem. By showing proof that they have undertaken the computational work, called hashing, the miner is entitled to process the block of transactions.
  • A miner is chosen to add the new block. There is a degree of randomness in deciding which miner gets the right to process the block. The winner receives new cryptocurrency coins and adds a new block to the blockchain.

“Miners work to solve complex mathematical problems to earn a reward,” says Dan Schwenk, managing director of Digital Asset Research. These are laborious problems that require significant computing power and energy to solve. Since miners have invested significant resources in the necessary computing equipment and energy costs, they are motivated to accurately validate transactions.

Proof of work review

Proof-of-work systems have drawn a lot of criticism, mostly around their massive appetite for electrical power:

  • Energy needs. According to the New York Times, in 2009, you could mine a bitcoin using an ordinary desktop computer and a negligible amount of electricity. But in 2021, you would have had to consume an amount of electricity equal to what a standard US house would use in nine years to mine one bitcoin.
  • Centralization. One of the most attractive features for cryptocurrency investors is decentralization. However, thanks to the intense computational and energy demands of proof of work, mining operations have become centralized in a small number of large companies. This could potentially lead to a few entities controlling the majority of cryptocurrency operations.

Cryptocurrencies that use proof of work

About 64% of the total market capitalization of the cryptocurrency universe use proof of work for validation. Some of the most popular cryptocurrencies include:

Proof of Work vs Proof of Stake

Proof of work and proof of stake are two different consensus mechanisms for cryptocurrency, but there are important differences between them.

Both methods validate incoming transactions and add them to a blockchain. With Proof of Stake, network participants are referred to as “validators” rather than miners. One important difference is that instead of solving mathematical problems, validators lock up defined amounts of cryptocurrency – their stake – in a smart contract on the blockchain.

In exchange for the “stake” cryptocurrency, they have the opportunity to validate new transactions and earn a reward. But if they incorrectly validate bad or fraudulent data, they can lose all or part of their stake as a penalty.

Proof of stake makes it easier for more people to participate in blockchain systems as validators. There is no need to purchase expensive computer systems and consume huge amounts of electricity to stake crypto. All you need are coins.

The last word

Proof of work is the more popular of the two main consensus mechanisms for validating transactions on blockchains. Although not without limitations, miners using proof of work help ensure that only legitimate transactions are recorded on the blockchain.

By doing so, miners also help protect blockchain security from potential attacks that could lead to losses for blockchain-based businesses.


Comments are closed.