What is Proof-of-Work (PoW)?

Proof-of-Work (PoW) is a cryptographic mechanism that safeguards the legitimacy of digital transactions. Many types of crypto, including Bitcoin, use Proof-of-Work as the basis for their crypto mining mechanism.

Essentially, Proof-of-Work requires that a complex mathematical puzzle is solved before a new block of transaction data can be made. Solving the puzzle requires a large amount of processing power, which translates into high energy costs. Mining bitcoin and other crypto accordingly requires significant amounts of electricity and processing power. But that’s not necessarily a bad thing, since investing so much energy and money into mining is also the reason why bitcoin transactions can be trusted as legitimate transfers of value.

Crypto like Bitcoin does not have a physical form. This makes it vulnerable to double-spending attacks. A double-spending attack occurs when someone spends the same coins twice. After spending them for the first time, they reverse the transaction or delete all records of it, thus allowing them to complete a transaction without actually giving away the coins.

Proof-of-work is one of the essential parts of the blockchain mechanism, helping prevent the data in the blockchain from being tampered with. Generating a PoW requires a significant amount of processing power, which translates into energy costs, to validate each transaction in the network. Since all transactions require a certain amount of work to be verified, creating false transactions also requires work and money. This safety feature ensures that all the transactions are legitimate and that coins are only spent once.

The method has proven to be a reliable way of securing crypto networks, but it does create an immense energy requirement. Because of this, alternatives to Proof-of-Work, such as Proof-of-Stake, have been implemented by newer blockchains.

Data is stored on a blockchain in aptly-named blocks. These are strung one after another on a continuously growing chain. Each block features a unique hash value, which functions as an ID number and is made up of several known elements, including transactions and the hash of the preceding block, and a random unknown number, called the nonce.

If any changes are made to any of the elements that comprise the hash, the block’s hash changes significantly. This means that changing a block on the chain requires the changing of all blocks that come after it as well, since their hash would be different. Because Proof-of-Work is needed to figure out each hash, immense amounts of computational work are necessary to modify the transaction data in a blockchain.

Solving Proof-of-Work problems is more like a lottery than a competition. Like a gold miner uses their pickaxe to prospect for ore, a Bitcoin miner uses their mining rig to process data, hoping to contribute to the blockchain. The main difference is that the Bitcoin miner is whacking away blindly.

Most of the elements that make up a block are known in advance. The miners’ job is to figure out the only variable that is not known in advance—the nonce. This is a randomly generated string of numbers that can only be figured out through trial and error.

Miners have no clue how close they are to finding the nonce. All they can do is try over and over, until one of them randomly gets it right. Within this system, every attempt at solving the puzzle consumes processing power. Consequently, increased computational capacity allows for more attempts in a given timeframe. This structure dictates that there are no shortcuts through cleverness; success is purely a result of increased effort and resource expenditure.

Miners are compensated for their work with transaction fees as well as newly mined coins. With most crypto, solving a Proof-of-Work problem creates new coins. These coins are awarded to the miner who solved the problem. Some crypto networks have no limit on how many new coins can be mined. Others, like Bitcoin, have a fixed amount of total possible coins.

As more miners compete to unlock new blocks, Proof-of-Work problems become more difficult. Thus, the average time it takes the miners to find the right combination remains constant. This average time, referred to as block time, differs from network to network.

Anyone can join the network as a miner (this is true for most, but not all blockchains). However, the cost of energy for running a rig that would profitably mine reputable crypto is huge. In the past, Bitcoin mining was possible using a standard computer; however, as the industry has evolved, expensive specialized equipment is now used as standard to solve Proof-of-Work problems. ASICs, or application-specific integrated circuits, are designed for mining and are highly efficient in this task. As a result, mining normally requires significant investment in equipment and technical know-how, which may not be feasible for all individuals or organizations. For individuals interested in acquiring crypto, an alternative is to simply buy it through a trusted exchange or platform.

Disclosures:

Content provided for educational purposes only. Not investment advice or a recommendation. Trading and owning digital assets involves significant risk, including the risk of substantial loss. Cryptocurrency services are offered through an account with Robinhood Crypto, LLC (NMLS ID 1702840). Robinhood Crypto is licensed to engage in virtual currency business activity by the New York State Department of Financial Services. Cryptocurrency held through Robinhood Crypto is not FDIC insured or SIPC protected.