If you’re new to the crypto world you may have heard the term “Proof of Work” in relation to different cryptocurrencies, especially Bitcoin. But what is Proof of Work and why is it important?

To understand Proof of Work (PoW) it’s key that you understand the basics of what a blockchain is, how mining works and what a distributed ledger is. For a quick and easy to understand guide on what these are, read our Beginner’s Guide to Bitcoin. Once you have a good understanding of the basics of blockchains, mining and distributed ledgers you can start to get your head around Proof of Work.

Proof of Work was originally thought of before Bitcoin even existed. But it was Satoshi Nakamoto, the creator of Bitcoin, who used the system in Bitcoin because it allowed for completely trustless and distributed consensus.

This basically means that the ledger that records any Bitcoin transaction is available for anyone to see and verify – it allows general agreement on what transactions have happened. It also completely negates the need for a third party when sending and receiving money, such as banks, VISA or Paypal etc.

That’s why Proof of Work was used in Bitcoin and has been used in many cryptocurrencies to date. But…

How is it actually used? And what even is it?

Proof of Work is a requirement that shows that the participants who actively validate transactions have invested enough computational resources into the validation process to ensure that it is legitimate.

Someone that validates a transaction is called a miner. Miners serve two purposes in a Proof of Work system.

• They verify the transactions that have taken place to avoid double spending of the currency.

• They also create new currency by receiving it as a reward for verifying the transactions.

These people use very fast, expensive computers to solve complicated algorithms. The miners’ computers will potentially have to solve 1,000,000,000,000,000,000,000 (1021) calculations to prove that the transaction is legitimate and that it is okay to add it to the blockchain. That’s a lot of work! When those calculations are complete and the block has been added, the work completed has been proven and the transaction is complete. That’s where the name Proof of Work comes from.

Using proof of work for something like Bitcoin does have problems. The vast computational requirements result is huge power consumption and the more Bitcoins in existence and the more transactions that take place the higher this power consumption will grow.

In addition to this the Proof of Work system rewards the first person who completes the calculation. This means people can put in hours or days of work, at huge expense in power and be rewarded with nothing. This can be alleviated a little using “mining pools” where many miners get together and combine computational resources in exchange for a smaller reward.

Proof of Work vs Proof of Stake

We’ve written a similar post called What is Proof of Stake? that simply explains the basics.

Proof of Work has a notable competitor to be the “best” system that can validate transaction on a blockchain. That is Proof of Stake (PoS).

Here’s a quick comparison of the two:

Proof of Work

• Simple system that is tried and tested and works very well at its primary purpose.

• It is notoriously energy demanding and is set to get worse as Bitcoin progresses if it stays in its current state.

• Very high, expensive computing power is now required as the calculations that need to be completed are very complex.

• Miners loyalty is likely to be with the coin that gives the best reward.

Proof of Stake

• No need for expensive hardware so it doesn’t have the same demanding energy needs as PoW.

• Potentially more loyal validators. The higher the stake of the validator the higher the chance they have of earning a transaction fee. This means that it is unlikely that someone who has investing a lot into a Proof of Stake cryptocurrency will suddenly switch to another one.

• Generally PoS transactions validate faster.

• With Proof of Stake the more of the currency you own the more say you have with the validation of the transaction. This means that there could be a situation where people with a huge amount of the coins/tokens will have noticeable more power that the everyday user.

Conclusion

When using a system based on traditional Proof of Work it is important to understand that it is only really useful when a trustless consensus is required. This can be, and has been, reached by other methods as well and it’s starting to look like Proof of Work is becoming a less and less popular solution to this problem.

We hope this article has helped shed some light on what Proof of Work actually is and how it is used. If you’re still stuck for answers connect with us on Facebook, Twitter or in the comments below.