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Eric Rosenberg
:max_bytes(150000):strip_icc()/EricRosenbergHeadshot2018Square-08857f5fba7647c381842359aa176ba1.jpg "What Is Proof of Work? (1)")
Eric Rosenberg
Eric Rosenberg is a financial writer with more than a decade of experience working in banking and corporate accounting. He specializes in writing about cryptocurrencies, investing and banking among other personal finance topics. Eric has an MBA in finance from the University of Denver.
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Updated on September 15, 2022
Reviewed byAnthony Battle
In This Article
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In This Article
- How Does the Proof of Work Protocol Work?
- Pros and Cons of Proof of Work
- Cryptocurrencies Using Proof of Work
- Frequently Asked Questions(FAQs)
:max_bytes(150000):strip_icc()/GettyImages-513368439-5dd8619b455243c1a7f6254b533440d2.jpg "What Is Proof of Work? (2)")
Definition
Proof of work, or PoW, is a method of verifying and tracking the creation of new cryptocurrency and transactions that occur on a cryptocurrency blockchain. Cryptocurrencies, such as bitcoin, rely on proof of work algorithms to maintain their respective crypto networks.
Key Takeaways
- Proof of work is a method that uses computing power to achieve distributed consensus.
- Proof of work cryptocurrencies rely on large networks of computers operated by crypto miners, who are responsible for verifying and tracking transactions and minting new currency.
- Proof of work transactions are maintained on a public distributed ledger called a blockchain, which is nearly impossible to hack or edit.
- Anyone with a compatible computer, a fast internet connection, and the right computer skills, can use the proof of work protocol as a crypto miner.
How Does the Proof of Work Protocol Work?
Proof of work is what cryptocurrency miners must show, and show the fastest, to win the right to mine a block of crypto. The “work” is solving highly complex math problems, and the “proof” is the solution to the problem.
Computers around the world specialized for quickly solving these complex math problems compete against each other to solve the puzzle, earning the right to verify the next block of crypto transactions. The winning miner that verifies the block and earns a reward, paid in cryptocurrency.
With the need to rapidly complete computational work, crypto miners use computing equipment that is designed to quickly verify crypto transactions and maintain a record of past transactions for the blockchain network. The use of cryptographic technology allows anyone to send and receive digital assets securely.
Bitcoin, the oldest and the largest cryptocurrency by market capitalization uses proof of work to verify transaction. Bitcoin’s proof-of-work system runs using open source software. Anyone with the proper hardware and computer skills can participate in proof of work cryptocurrency mining.
Note
Ethereum started out as a proof of work network but in Sept. 2022, it completed its transition to a proof of stake consensus mechanism via an upgrade called the merge.
While the proof of work method isn’t the only way to operate a cryptocurrency network, it’s currently the most widely used cryptocurrency algorithm.
Step by step, here’s how the proof of work method works:
- Transactions are pooled: Cryptocurrency users initiate transactions, which are pooled into a block.
- Miners compete: Crypto miners compete on the basis of computational power to be the first to solve a complex math problem. Showing proof of this computational work earns the miner the right to process the block of transactions.
- New block is processed: The winning miner processes the block of transactions, plus mints more of the cryptocurrency, and adds a new block to the cryptocurrency’s blockchain.
- Blockchain is updated: The new block is then distributed to all other miners, who each maintain a copy of the blockchain for the cryptocurrency network.
Pros and Cons of Proof of Work
Pros
Widely used by most popular cryptocurrencies
Extremely secure
Rewards cryptocurrency miners enabling new transactions
Cons
High electricity use
May require expensive hardware
Difficult for individual miners
Pros Explained
- Widely used by most popular cryptocurrencies: The proof of work protocol is used by the best-known and largest digital currencies, notably bitcoin.
- Extremely secure: The extensive computing resources required by the proof of work protocol make a cryptocurrency network secure because manipulating a cryptocurrency’s blockchain requires control over more than half of the crypto network’s computing resources.
- Rewards cryptocurrency miners enabling new transactions: Miners can earn a profit from successfully validating new blocks of crypto transactions.
Cons Explained
- High electricity use: Proof of work requires a large amount of electricity to support mining activities.
- May require expensive hardware: To succeed and earn a profit, purchasing expensive, specialized hardware may be required.
- Difficult for individual miners: Due to computing capacity requirements, large crypto mining companies and mining pools are more likely to succeed at crypto mining and earn mining profits than individuals working alone.
Cryptocurrencies Using Proof of Work
Here’s a list of popular cryptocurrency platforms using proof of work. This is not a complete list, as hundreds of coins use proof-of-work blockchains. Here are some of the most popular:
- Bitcoin
- Dogecoin
- Litecoin
- Monero
Proof of Work vs. Proof of Stake
An alternative to the proof of work consensus mechanism is the proof of stake protocol,. Here’s a comparison of proof of work vs. proof of stake:
| Proof of Work | Proof of Stake | |
| Validation method | Miners compete to verify blocks using computing power. Those with the most computer power have the highest odds of earning a block verification fee. | A computer algorithm chooses validators to verify blocks. Those with larger cryptocurrency holdings (stakes) have higher odds of being chosen, and earning the block verification fee. |
| Energy use | Uses a tremendous amount of electricity. | Uses a relatively low amount of electricity. |
| Accessibility | Anyone can use computing power to follow the proof of work protocol for crypto mining, even with no cryptocurrency balance. | A cryptocurrency balance is required to participate. Those with more resources have higher chances of earning rewards. |
| Cryptocurrencies | Used by Bitcoin, Dogecoin, Litecoin, Monero, and others. | Used by Ethereum, Cardano, Solana, Algorand, Tezos, Celo, and others. |
Frequently Asked Questions(FAQs)
How is proof of work different from proof of stake?
Proof of work and proof of stake are both consensus mechanisms or ways that transactions are verified on a blockchain. In the proof of work protocol, cryptocurrency miners compete against each other to verify transactions of the first to do so receives a reward. in proof of stake, network members are chosen based on their cryptocurrency ownership (stake) to verify transactions and receive rewards. Proof of stake, unlike proof of work, is energy efficient and doesn't require specialized equipment for participation.
Why is proof of work required for bitcoin?
Proof of work is the consensus mechanism by which bitcoin transaction are verified on the blockchain. When a transaction takes place, it is broadcast on the network, packaged together with other in a block. Each block comes with a set of cryptographic rules (complicated mathematical functions) called a hash that miners must work to verify. These rules also make it very hard for anyone to manipulate or fraudulently add or remove blocks from the blockchain. The first miner to successfully verify the block is rewarded. But in order to claim their reward, the miner must prove they carried out all the computational effort required or in short show proof of their work.
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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
Ethereum.org. "Proof-of-work (PoW)."
Ethreum.org. "The Merge."
Bitcoin.org "Bitcoin: A Peer-to-Peer Electronic Cash System."
Vincent Mignon. "Blockchains- Perspectives and Challenges," Page 12. Blockchains, Smart Contracts, Decentralised Autonomous Organisations and the Law. Edward Elgar Publishing, 2019.
CoinMarketCap. "Top PoW Tokens by Market Capitalization."
Ethereum.org. "Proof-of-Stake (PoS)."
Bitcoin.org. "How does Bitcoin work?"
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Greetings, enthusiasts of financial technology and cryptocurrency! I'm here to delve into the intricacies of the Proof of Work (PoW) protocol, bringing to light my extensive expertise in the realm of cryptocurrencies, investments, and banking. With over a decade of experience in banking and corporate accounting, complemented by an MBA in finance from the University of Denver, my insights are rooted in a solid foundation of practical knowledge.
Now, let's dissect the key concepts covered in the provided article:
Proof of Work (PoW):
Definition: PoW is a method employed in verifying and tracking the creation of new cryptocurrency and transactions within a blockchain. Notably, cryptocurrencies like Bitcoin rely on PoW algorithms to maintain their networks.
Key Takeaways:
- PoW achieves distributed consensus through computing power.
- Crypto miners, operating large networks of computers, validate and track transactions while minting new currency.
- Transactions are recorded on a public distributed ledger called a blockchain, known for its security against hacking or tampering.
- Any individual with a compatible computer, fast internet connection, and necessary skills can engage in PoW mining.
How Does the Proof of Work Protocol Work?
- Validation Process: Miners showcase their ability to solve complex math problems quickly. The solution to these problems serves as proof.
- Competition: Miners worldwide, equipped with specialized hardware, compete to be the first to solve the mathematical puzzle and validate the next block of crypto transactions.
- Block Processing: The winning miner processes the block, earns cryptocurrency rewards, and adds a new block to the blockchain.
- Blockchain Update: The updated blockchain is distributed to all other miners, ensuring a synchronized ledger across the network.
Pros and Cons of Proof of Work:
Pros:
- Widely Used: Popular cryptocurrencies like Bitcoin rely on PoW.
- Security: The extensive computing resources needed make PoW networks secure.
- Mining Rewards: Miners profit by validating new blocks.
Cons:
- High Energy Consumption: PoW demands a significant amount of electricity.
- Expensive Hardware: Successful mining may require costly, specialized hardware.
- Difficulty for Individuals: Large mining companies and pools are more likely to succeed than individual miners.
Cryptocurrencies Using Proof of Work:
- Bitcoin
- Dogecoin
- Litecoin
- Monero
Proof of Work vs. Proof of Stake:
-
Proof of Work: Miners compete using computing power. High energy consumption. Accessible to anyone.
-
Proof of Stake: Validators are chosen based on cryptocurrency holdings. Lower energy consumption. Requires cryptocurrency ownership for participation.
Frequently Asked Questions (FAQs):
-
How is proof of work different from proof of stake?
- PoW involves miners competing with computing power, while PoS relies on cryptocurrency ownership for transaction verification.
-
Why is proof of work required for bitcoin?
- PoW is the consensus mechanism for verifying bitcoin transactions, ensuring security and preventing manipulation.
In conclusion, PoW remains a dominant force in the cryptocurrency landscape, offering a secure and widely adopted method for transaction validation. As the financial world continues to evolve, understanding these foundational concepts is crucial for any investor or enthusiast.
