What is Proof of Work?

Bitcoin is the first cryptocurrency to adopt the Proof of Work consensus mechanism to validate transactions on the blockchain. Miners solve complex mathematical computations hashes, and when they solve a matching block, it is added to the blockchain, and they get compensated for their work.

Understanding Proof of Work is essential for those investing in cryptocurrency. Here’s a guide to how it works, its pros and cons, and examples of how cryptocurrencies use it.

How Proof of Work Works

The proof-of-work model is a consensus mechanism used to confirm and record cryptocurrency transactions.

Every cryptocurrency has a blockchain, a public ledger made up of blocks of transactions. 

With Proof of Work cryptocurrencies, each block of transactions has a specific hash. For the block to be validated, a crypto miner must generate a target hash that is less than or equal to the target hash of the block.

Miners use powerful mining devices that quickly generate computations to accomplish this. The aim is to be the first miner to meet the target hash so that you can update the blockchain and receive your crypto rewards.

Proof of work in cryptocurrency works well because finding the target hash is difficult, which makes up for better security, but verifying it isn’t. The process is difficult enough to prevent the manipulation of transaction history. At the same time, once a target hash is found, it’s easy for other miners to check it.

What are Hashes?

When a block is completely mined, the hash must be verified before a new block can be opened. This is the foundation of the proof of work mechanism. A hash is a 64-digit encrypted hexadecimal number. With recent technology, a hash can be generated for large amounts of data in milliseconds. However, bitcoin miners try to solve that hash, which takes a long time to compute.

Proof of Work Vs Proof of Stake

The primary difference between PoS and PoW is the difficulty requirement and the energy consumption. 

In Proof of Stake, validators compete for blocks by staking or delegating more blockchain tokens to the staking pool. This requires less energy than Proof of Work but can make entering very expensive.

A Proof-of-work consensus mechanism is used more for cryptocurrencies focused on financial use cases like Bitcoin. Other blockchains like Ethereum, Solana, and Cardano focus on powering decentralized applications using proof-of-stake(PoS). 

Crypto Projects Using Proof of Work

More than 60% of cryptocurrencies utilize the Proof of Work. However, the most popular projects using the consensus mechanism are:

1. Bitcoin:

The blockchain is the world’s most secure and decentralized Proof of Work blockchain. Bitcoin’s success is attributed to Satoshi’s ingenious Proof of Work engineering, which, beyond security, provides sustainable economics for network participants and a hedge against inflation.

2. Litecoin:

Litecoin is a Bitcoin fork that copies aspects of the blockchain, such as its PoW. Litecoin is often called the silver Bitcoin and remains among the top cryptocurrency assets by market capitalization.

Bitcoin Cash was created in 2017 as another Bitcoin hard fork. It utilizes PoW. Bitcoin Cash was created as an alternative to address Bitcoin’s scalability and transaction speed issues by increasing the block size to 32 MB. 

However, BCH has faced criticism as being centralized due to dominance by a few pools.

4. Dogecoin: 

Dogecoin is a Meme-inspired cryptocurrency that launched in 2013. It uses the PoW consensus mechanism. Dogecoin and Litecoin both enable faster transactions but are less secure than Bitcoin.

5. Monero: 

Monero is a privacy-focused blockchain with a proof-of-work algorithm. Its unique features include ring signatures and stealth addresses, making tracing transactions on the blockchain difficult. 

Monero’s proof-of-work algorithm is ASIC-resistant, meaning it is more accessible to individual miners rather than large mining operations.

Challenges with Proof of Work

Energy consumption

The most significant criticism of the Proof of Work consensus mechanism is that it uses much more energy than any other blockchain. Multiple research studies show that Bitcoin uses more energy than several countries, such as Argentina and Norway. 

Still, other research studies assume that the Bitcoin network significantly contributes to global warming and will continue as adoption grows.

Nonetheless, other evidence points to the contrary regarding the impact of Bitcoin and its Proof of Work system. Bitcoin consumes significantly less energy than traditional financial systems and other major industries, including gold and crude oil mining.

Another crucial point is that energy is the only variable in Bitcoin mining, so miners seek out the cheapest methods, like renewable sources. Over time, miners are adopting these cost-effective energy sources to maximize profits. Surveys estimate that nearly 59% of Bitcoin mining farms use 

Additionally, Bitcoin’s Proof of Work mechanism allows individuals and organizations to utilize energy that may otherwise be wasted. This is especially true for power generated in places like oil drilling sites that produce flare gas, agricultural regions generating biomass energy or jurisdictions where it’s not practical to transport such energy. 

Bitcoin mining machines’ portability allows miners to use and monetize such power and provide economic value to the local communities.

Scalability

Another common criticism against Proof of Work systems such as Bitcoin is that they don’t scale as efficiently as the latest consensus models like Proof of Stake. 

Bitcoin advocates argue that Bitcoin’s positioning as a global financial system means the delayed transaction confirmation time contributes immensely to the network’s unique security. 

Centralization 

Critics argue that Proof of Work consensus algorithms have become more centralized. The increasing cost of entry and computing difficulties have consolidated network consensus decisions around a few major mining pools.

These pools control a significant portion of the consensus because they collectively have more hashing power than individual miners. But this power is contingent on the pools acting in good faith — contributors can leave the pool anytime.  

For example, Bitmain, one of the largest cryptocurrency mining hardware manufacturers, controlled several mining pools and had more than 43% of the hashing power in 2018. With some strategic moves, Bitmain may have been able to execute a double-spend attack. The damage that would have been done to Bitcoin and its reputation prevented it from executing the attack.