What Is Proof of Work (PoW) in Blockchain?

What Is Proof of Work (PoW)?

Proof of work (PoW) describes a consensus mechanism that requires a significant amount of computing effort from a network of devices. The concept was adapted digital tokens by Hal Finney in 2004 through the idea of “reusable proof of work” using the 160-bit secure hash algorithm 1 (SHA-1).

Following its introduction in 2009, Bitcoin became the first widely adopted application of Finney’s PoW idea (Finney was also the recipient of the first bitcoin transaction). Proof of work forms the basis of many other cryptocurrencies, allowing for secure consensus.

Key Takeaways

• Proof of work (PoW) is a decentralized consensus mechanism that requires network members to expend effort in solving an encrypted hexadecimal number.
• Proof of work is also called mining, in reference to receiving a reward for work done.
• Proof of work allows for secure peer-to-peer transaction processing without needing a trusted third party.
• Proof of work at scale requires vast amounts of energy, which only increases as more miners join the network.

Understanding Proof of Work

This explanation will focus on proof of work as it functions in the Bitcoin network. Commonly called a cryptocurrency, Bitcoin is technically a token—a representation of ownership of value on the Bitcoin blockchain. The ownership of the token can be exchanged for something of equal value, much like how you hand someone a dollar for a candy bar—they now have the dollar and you have the candy bar.

Proof of Work Blockchains

Blockchains are distributed ledgers that record all bitcoin transactions, similarly to how you would enter transactions in a spreadsheet. Each block is similar to a cell. Information such as transaction amounts, wallet addresses, time, and date are recorded and encrypted into a block header—a hexadecimal number created through the blockchain’s hashing function.

The hash from each block is used in the block that follows it when its hash is created. This creates a ledger of chained blocks that cannot be altered because the information from every block is included in the newest block’s hash.

Hashes

When a block is closed, the hash must be verified before a new block can be opened. This is where proof of work comes in. The hash is a 64-digit encrypted hexadecimal number. With modern technology, a hash can be generated in milliseconds for a large amount of data. However, miners try to guess that hash, which takes a very long time in computing terms.

Mining is the process of validating transactions by solving the hash and receiving a reward.

Nonce

The hash includes a series of numbers called the nonce, short for “number used once.” When a miner—the program on a node that works to solve the hash—begins mining, it generates a hash from publicly available information using a nonce equal to zero.

Solving the Hash

If the hash is lower than the current network target, the miner has successfully solved the hash. The network target is a mathematical result of a formula converted to a hexadecimal number that dictates the mining difficulty.

If the hash is greater than the target, the mining program adds a value of 1 to the nonce and generates a hash again. The entire network of miners tries to solve the hash this way. On the Bitcoin blockchain, the miner that solves the hash is given the current reward for the work done.

Proof of Work vs. Proof of Stake

The two most popular consensus mechanisms are proof of work and proof of stake. Bitcoin’s top competitor Ethereum used proof of work on its blockchain until September 2022, when the highly-anticipated transition to proof of stake was made. Here are some of the key differences between the two.

Proof of Work

• Validation is done by a network of miners

• Bitcoin paid as a reward and for transaction fees

• Competitive nature uses lots of energy and computational power

Proof of Stake

• Validation is done by participants who offer ether as collateral

• Ether is paid for transaction fees only

• Less computational power and energy used

Special Considerations

Mining is a competitive process, so it has become a race between those with the most computational power. So, miners join pools to increase their chances of receiving a reward because it takes an enormous amount of computing work to be competitive.

On Feb. 9, 2023, the mining pool FoundryUSA accounted for nearly 32% of the Bitcoin network’s three-day hashrate—the number of hashes a network can perform per second. FoundryUSA hashed 89.81 exa hashes per second (EH/s)—the pool generated nearly 90 quintillion (90 x 1018) hashes per second.

Single or individual PoW miners are not able to compete with pools for rewards.

Proof of work is also known for its energy consumption. The University of Cambridge tracks the Bitcoin network energy demand and uses a “best guess estimate” to determine its usage. The network uses as much energy as some small countries; however, it’s important to note that industrial data networks and data centers use far more energy than the Bitcoin network.

Proof of work is also a much slower validation method than other mechanisms. For example, more transactions are taking place than the Bitcoin network can handle. Transactions are stored in a mempool waiting for validation, with average confirmation times between Jan. 1 and Feb. 9, 2023, ranged from seven to 91 minutes (confirmation is when your transaction is confirmed). Bitcoin keeps its block times at an average of 10 minutes—compare this with block times on the Ethereum PoS network, which have averaged 12 seconds since September 2022.

Example of Proof of Work

Proof of work requires a computer to randomly engage in hashing functions until it arrives at an output with the correct minimum amount of leading zeroes. For example, the hash for block #775,771, mined on Feb. 9, 2023, is:

00000000000000000003aa2696b1b7248db53a5a7f72d1fd98916c761e954354

The block reward for that successful hash was 6.25 BTC and 0.1360 BTC in fees.

The nonce was 2,881,347,934, there were 1,519 transactions in the block, and the total value of the block was 1,665.9645 BTC. Remembering that a hash is generated and the nonce starts at zero, this block was hashed by a miner 2.8 billion times before reaching a number less than the target.

What Does Proof of Work Mean?

PoW requires nodes on a network to provide evidence that they have expended computational power (i.e., work) to achieve consensus in a decentralized manner and to prevent bad actors from overtaking the network.

Why Do Cryptocurrencies Need Proof of Work?

Because they are decentralized and peer-to-peer by design, blockchains such as cryptocurrency networks require some way of achieving both consensus and security. Proof of work is one method that makes it too resource-intensive to overtake the network. Other proof mechanisms also exist that are less resource-intensive. Without a proof mechanism, the network and the data stored within it would be vulnerable to attack or theft.

Does Bitcoin Use Proof of Work?

Yes. It uses a PoW algorithm based on the SHA-256 hashing function to validate and confirm transactions and issue new bitcoins.

The Bottom Line

Proof of work is a consensus mechanism used by many cryptocurrencies to validate transactions on their blockchains and award tokens for participating in the network. Proof of work is a competitive process that uses publicly available transaction information to attempt to generate a hexadecimal number less than the network target for that mining period. Under PoW consensus, thousands of mining programs work on one block until the hash is solved, then move to the next block.

Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual’s situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author does not own cryptocurrency.