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  • Proof of work enables Bitcoin transactions to to be confirmed and recorded without a central authority.
  • It disincentivizes attacks on a crypto's blockchain by making verifying transactions expensive.
  • Proponents of proof of work contend it's more secure than other mechanisms like proof of stake.
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Bitcoin's most notable feature is its decentralization. It operates securely without the involvement of a central authority. A distributed network of users store and update the digital ledger that records transactions — called the blockchain — on their own computing hardware.

However, this raises an important question: Without a central authority to act as a final arbiter, how does Bitcoin ensure that nobody manipulates the blockchain for their own ends? The answer is proof of work.

Proof of work is a consensus mechanism used to confirm that network participants, called miners, calculate valid alphanumeric codes — called hashes — to verify Bitcoin transactions and add the next block to the blockchain. It does so by having other participants in the network verify that the required amount of computing power was used by the miner that is credited with calculating the valid hash. 

What role does proof of work play in cryptocurrencies?

proof of work is all about creating a positive incentive for people to invest in the resources it takes to add valid blocks to a cryptocurrency's blockchain.

"The challenge in a blockchain like Bitcoin is to maintain an agreed transaction record without having a central authority," says William J. Knottenbelt, a professor at Imperial College London's Department of Computing. "So the key question is how a group of peers of similar status can agree upon which of them should be authorized to add to the common transaction record."

The process of calculating a hash is intentionally made extremely computationally difficult. By forcing participants to invest significant amounts of money in computing resources, the proof of work mechanism creates a disincentive against trying to undermine the blockchain's integrity. It also reduces the potential for a single Bitcoin being spent simultaneously more than once — known as double spending — which would destroy confidence in the cryptocurrency.

"Proof of work is how miners (block publishers) prove to the world that they have put in the necessary work to create a well-formed block of transactions to add to the blockchain." says Knottenbelt. "From the miner's perspective they are turning the energy they put into the search for valid blocks (for which they typically purchase special high-performance hardware) into money (in the form of the rewards they obtain from coinbase rewards and transaction fees)."

Bitcoin mining is essentially a competition where miners are all racing to be the first to solve extremely complex cryptographic puzzles, enabling them to add the next block to the blockchain and receive payment in the form of new Bitcoins. The winning miner receives the reward only after the other systems in the network, through the proof of work protocol, verify that the solution is correct and valid.

This involves a serious amount of number crunching, with the equipment used by miners having to go through much trial and error before finding the correct hash.

"Proof of work uses a lottery mechanism — miners create candidate blocks of transactions (including a reward for themselves) which must satisfy several strict conditions," Knottenbelt explains. "They then test to see if these conditions are fulfilled. Almost all of the time they are not and the miner has to go back and try again."

It's because most candidate blocks do not include the correct hash that so much work is involved in verifying Bitcoin transactions. And in fact, the difficulty of this process can increase or decrease, in order to ensure that new blocks are produced at regular intervals.

"The difficulty of the lottery is adjusted periodically so that if blocks are being produced too quickly then it becomes harder to satisfy the conditions necessary for producing a valid block and if the blocks are being produced too slowly then it becomes easier," Knottenbelt adds.

Where did proof of work come from?

While proof of work is most associated with Bitcoin, its sources trace further back in time than 2008, when the pseudonymous Satoshi Nakamoto published the Bitcoin white paper. The concept has been around in the computing world since at least the early 1990s, and the term 'proof of work' is thought to have first surfaced in an article by computer scientists Ari Juels and Markus Jakobsson in 1999.

With Bitcoin, Nakamoto based the cryptocurrency's proof of work mechanism largely on Hashcash, a denial-of-service countermeasure outlined by Adam Back in 1997. In particular, Nakamoto envisaged proof of work as a means of ensuring that it becomes exponentially difficult to attack the Bitcoin blockchain as more blocks are added to it.

Which cryptocurrencies use proof of work?

Aside from Bitcoin, pretty much all the cryptocurrencies based on or forked from it also use proof of work. These include:

  • Bitcoin Cash
  • Bitcoin SV
  • Litecoin
  • Dogecoin
  • Bitcoin Gold

There are also a wide variety of other cryptocurrencies not based on Bitcoin that currently use proof of work, including:

  • Ethereum
  • Ethereum Classic
  • Monero
  • Zcash
  • Kadena
  • Ravencoin
  • Siacoin
  • Horizen
  • DigiByte

While proof of work is popular, another consensus mechanism known as proof of stake is also widely used. Instead of verifying the amount of computational work done, proof of stake uses the amount of cryptocurrency block publishers are willing to deposit as insurance against their misbehavior.

"Conceptually this is quite appealing because it short-cuts the step of having to invest in high-performance mining hardware and also the energy related to the use of that hardware," Knottenbelt says.

However, proponents of proof of work argue that proof of stake and other consensus mechanisms inevitably lend themselves to some form of centralization, precisely the thing proof of work was designed to avoid.

"Proof of stake is fundamentally centralized," says Jimmy Song, a Bitcoin author, educator, and developer. "There's no way to tell which to go with in case of a conflict." 

Advantages and disadvantages of proof of work

This leads to a consideration of the relative advantages and disadvantages of proof of work as compared to other mechanisms, such as proof of stake.

Most importantly, proof of work arguably provides a higher level of security than other means of consensus, with Bitcoin now running for more than a decade without a significant outage or compromise.

"Security-wise, proof of work has empirically been shown to work very well for more than 10 years," Knottenbelt says. "The jury is still out on proof-of-stake."

But while proof of work does afford an optimal level of security and decentralization, it imposes one substantial cost: It consumes a considerable amount of energy.

By some estimates, proof of work leads to the Bitcoin blockchain using energy each year equivalent to the consumption of a nation the size of Thailand. It also produces a large amount of electronic waste in the form of mining units that are discarded for ever more powerful models.

For anyone who values Bitcoin and believes it's an important contribution to the evolution of money, such energy consumption and waste is a justifiable price to pay for the only consensus mechanism that has really been proven to be robust at scale. Conversely, for anyone who remains skeptical of cryptocurrencies, it's basically a scandal.

The financial takeaway

Proof of work is a consensus mechanism that ensures that miners add a new block to a cryptocurrency's blockchain only after producing a substantial amount of computational work to prove that it's valid.

Because proof of work requires a significant investment in resources, it makes it increasingly less likely that miners and network participants will seek to undermine a cryptocurrency's blockchain. This is particularly the case with Bitcoin, which has been running at scale for some 12 years without suffering a double-spend attack.

However, proof of work also requires the expenditure of a large amount of electricity. This is something critics of Bitcoin would argue produces too much of an environmental impact to justify the improved security it offers in comparison to mechanisms such as proof of stake.

Simon Chandler is a technology journalist based in London, UK. His focus resides mainly with cryptocurrencies, consumer tech, AI, big data and social media, although he also writes about finance, politics and culture. He has bylines in such outlets as Forbes, Wired, TechCrunch, the Daily Dot, the Verge, Cointelegraph, Cryptonews, TechRadar, the Sun, RT.com, Guitar World, Bandcamp, the Kenyon Review and Tiny Mix Tapes.

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