What is Proof of Work?

By Michael Thorburn

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Proof of Work (PoW) is a decentralized system that requires individuals to solve mathematical puzzles to stop malicious uses of computing power.

The concept of Proof of Work was adapted to securing digital money by Hal Finney in 2004 using the SHA-256 hashing algorithm.

Due to its decentralized nature, many cryptocurrencies including Bitcoin have adopted Finney’s Proof of Work idea to validate and secure transactions and enable the mining of new tokens.

How PoW works

In the example of Bitcoin, Bitcoin is a blockchain that is a shared ledger that stores the history of every Bitcoin transaction in blocks. Adding new blocks to the Bitcoin blockchain and preventing malicious activity or tampering of records requires Proof of Work to be undertaken by members of the Bitcoin network or miners.

Members of the network detect tampering and validate transactions through hashes, long strings of numbers that serve as Proof of Work. When a set of data is put through the SHA-256 hash function, it will only ever generate one hash. This hash cannot be used to obtain the original data, it is only used to validate that the generated hash matches the original data.

Undertaking Proof of Work requires significant computing power and knowledge, on average members of the network will generate Proof of Work every ten minutes. Successful Proof of Work is often rewarded with newly created Bitcoins.

Proof of Work makes it incredibly difficult to alter any aspect of the blockchain, as it would require the re-mining of all subsequent blocks. It requires a computer to randomly engage in hashing functions until it achieves an output with the correct minimum number of leading zeroes.

For example, the hash for block #660000, mined in December 2020 is:

00000000000000000008eddcaf078f12c69a439dde30dbb5aac3d9d94e9c18f6.

This block will always contain 745 transactions involving just over 1,666 Bitcoins. Any attempts to alter transactions within this block would be rejected as a fraud attempt by the network. The block reward for this successful hash was 6.25 Bitcoins.

Benefits of Proof of Work

Enables peer-to-peer transactions

In the example of cryptocurrencies, Proof of Work enables transactions to be securely processed peer-to-peer without the need of using a trusted third party.

Provides high levels of security

For a block to be manipulated to create a malicious block it would require more than 51% of the network mining power to action the change. This helps to achieve high levels of security to ensure transactions are secure.

Drawbacks of Proof of Work

Requires huge amount of energy and computing power

To provide Proof of Work at scale, significant amounts of energy and computing power are needed, not only can this have a negative impact on the environment but the costs of this can also outweigh any gains.

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Author: Michael Thorburn

This article does not provide any financial advice and is not a recommendation to deal in any securities or product. Investments may fall in value and an investor may lose some or all of their investment. Past performance is not an indicator of future performance.