What is Proof of Work?

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• Published: April 10th, 2020
• Updated: September 3rd, 2020

When people think about proof of work, they often think Bitcoin was the first one to implement it.

Here’s the deal:

Proof-of-Work existed before Bitcoin.

Satoshi Nakamoto was not the inventor of Proof-of-Work. Although, he was the first person to use Proof-of-Work for a monetary system. This is what makes it unique.

Satoshi Nakamoto combined several prior inventions to create Bitcoin. One of the inventions was called Proof-of-Work (PoW).

PoW was developed in the 90s as a service to prevent denial of service (DoS) attacks such as spam on a network.

Before we dive into what Proof-of-Work is, we strongly recommend reading our introduction article to Bitcoin mining.

Remember that Bitcoin mining servers two primary functions:

  • Miners validate all the transactions submitted to the network. They ensure the transactions follow Bitcoin’s consensus rules. This protects the network from invalid transactions (ie. double spend)
  • Mining brings new bitcoins into circulation. The amount issued is fixed and follows a fixed schedule (amount of bitcoin released is known in advance).

Miners are incentivized to invest in mining equipment because of the reward. However, this is not the main purpose of mining. Its purpose is to ensure the security of the bitcoin system without the need for a central authority.

What is Proof of Work?

Proof-of-Work, or abbreviated as PoW, is a mechanism used in the Bitcoin blockchain to arrive at consensus. Coordinating amongst multiple participants around the world on the current set of transactions is difficult.

Consensus is achieved without the need for a central authority using the Proof-of-Work algorithm.

How Does PoW Work

Every 10 minutes a competition is held on the Bitcoin network. Miners create their own blocks and fill them with transactions that need to be validated. Miners will validate the transactions and compete to have their block added to existing blocks (ie. blockchain). The first miner to solve a very complex math problem gets to add their block.

The math problem is very hard to solve. On average, it takes about 10 minutes for a miner to find a solution. To keep the 10 minute solution time, a difficulty adjustment is used. As more miners compete, the difficulty gets harder. If miners leave the competition, the difficulty gets easier. As soon as a miner finds a solution and publishes their block to the blockchain, the competition starts over.

By performing math calculations and finding a solution, miners are proving to the network they expended energy to validate transactions and secure the network. In return, they will earn a reward for doing so.

Jigsaw Puzzle Analogy

PoW is similar to how a jigsaw puzzle works. In a jigsaw puzzle, fitting all the correct pieces takes a long time. However, it takes a relatively short time for someone to come and verify the puzzle was solved correctly. Similarly, finding a solution to the math problem takes a lot of power from miners, but once a solution is found, anyone can quickly verify if the solution is correct.

(Picture of a Scrambled Jigsaw Puzzle) – (Picture of finished Jigsaw Puzzle)
“Hard to Solve “ – “Easy to Verify”

Why Miners Compete

When a miner “wins” the competition and adds their block to the existing blocks, they earn a reward. The reward comes in the form of new bitcoin and transaction fees. Currently, the reward is 6.25 bitcoin plus transaction fees which come from users paying to send transactions on the network. The reward can only be collected if the miner correctly validates the transactions in accordance to Bitcoin’s consensus rules.

Disadvantages of PoW

PoW is very energy-intensive. The equipment used is specialized hardware which can only be used to mine bitcoin. The equipment also requires a lot of electricity to operate. So much so that the energy consumption of Bitcoin is equivalent to small countries such as Venezuela.

Fortunately, Bitcoin mining operations move to areas where there is an oversupply of electricity. Why? Because these are the areas where electricity is cheapest. This is important for mining operations because electricity costs can account for 30 – 70% of their total costs of operation.

Although mining is energy-intensive, it’s estimated that some 74% of all Bitcoin mining electricity comes from renewable energy sources.

Advantages of Proof of Work

Bitcoin is a multi-billion dollar honeypot. If it was easy to attack the network it would have been done long, long ago. It’s not. After more than a decade there has not been a single substantial hack performed against Bitcoin.

Thus we can see that POW (when implemented en masse) is extremely secure. It’s simple, effective and well-understood. The same cannot be said for other consensus mechanism like POS (Proof of Stake). It’s not that POS is bad it’s just that it has not withstood the pressure that POW networks have proven themselves under.

Also, a large Proof of Work network is extremely difficult to attack for logistical reasons. Even if an individual or organization had billions to spend on ASICs, the order for those miners would raise many red flags.

There are only a handful of major ASIC manufacturers in the world

There are only several large ASIC manufacturers in the world and were a malicious actor to try and buy half a million units it’s highly unlikely that the ASIC manufacturers would (could) complete an order so large. It’s not even like the ASICs can be accumulated over the span of several years as ASICs quickly become obsolete. Thus attacking Bitcoin or any other large POW network would not be easy.

Disadvantages of Proof of Work

Large mining farms are a real problem for Bitcoin and other large POW cryptocurrencies. Decentralization is the golden ideal of any cryptocurrency but it’s hard to claim that you’re fully decentralized if only a handful of extremely powerful mining operations control the majority of the ASIC miners.

It wouldn’t take very many miners colluding to reach the point where they controlled 51% or more of all the ASIC miners securing Bitcoin. At that point they could take over the network.

Admittedly they would be very likely to do so as they would be destroying their livelihood and making worthless the hundreds of millions of dollars’ worth of ASIC that they collectively own. However, a concern that comes up repeatedly is that the miners may not have a choice.

Historically a majority of Bitcoin mining has happened in China (cheap energy, flexible regulations). There has always been a lingering concern then that the Chinese government could force the mining operators to collude and attack Bitcoin.

Thankfully the likelihood of this happening is decreasing by the day as mining operations are increasingly being brought online in other regions. While this a Bitcoin specific example, the same concern would apply to any POW network where a majority of the miners are located in the same state, nation, region, etc.

Finally, there is a somewhat valid critique that POW uses a significant amount of energy. This is true, however, what’s less discussed is that quite a bit of the energy for mining comes from renewable energy, especially hydropower in China that may otherwise go unused. That being said, POW mining does require electricity and that’s one of its primary downsides as compared to a consensus mechanism like POS or BFT.

Hydro power is a cheap source of electricity for Bitcoin mining

Conclusion

Proof of Work is the consensus mechanism that’s gotten crypto to where it is today. From Bitcoin to Ethereum to Litecoin, POW keeps the largest cryptocurrencies safe.

It’s simple, reliable and secure. The question for the next decade is whether POW will remain dominant. Will other consensus mechanisms like POS and BFT replace POW? Only time will tell. For now though Proof of Work is still securing the largest two cryptocurrencies (among many others) and it has a great record that will be tough to beat.

What did you learn:

  • Satoshi Nakamoto used Proof-of-Work as a mechanism to arrive at consensus amongst the current set of transactions (ie. Who owns what)
  • Proof-of-Work involves a competition amongst miners to compete to have their block full of validate transactions added to the blockchain
  • The first miner to solve the Proof-of-Work solution earns a reward.
  • The Proof-of-Work competition is held every 10 minutes
  • One major disadvantage of Proof-of-Work is that it consumes a lot of electricity
Austin Tuwiner Administrator
Austin is the owner of Bitpremier, and got involved in Bitcoin in 2012. After working as a cryptocurrency journalist and and at several blockchain startups, he decided to start Bitpremier and educate the world on Bitcoin.
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