Proof-of-Work (PoW) Cryptocurrency: How It Works & Bitcoin

In cryptocurrency, proof-of-work (PoW) is system that uses hard-to-compute but easy-to-verify functions to limit exploitation of cryptocurrency mining.

FACT: Bitcoin is the most well known crypto with a Proof-of-Work consensus building algorithm.

How Does Proof-of-Work Work?

A proof-of-work system’s hash function – the algorithm used to find a solution to the computational puzzle – is simple to calculate an output for if given an input, but it is nearly impossible to do the reverse for without trying every possible input until one works by random chance. When people mine digital coins and add blocks of transactions to public ledgers, they are typically “cracking” a proof-of-work system by using high-powered computers to solve a mathematical problem.

FACT: The most well known proof-of-work function is called SHA256 (part of the SHA-2 family of Secure Hash Algorithms). This is the one they use for bitcoin. It was first used for “Hashcash” by Adam Back in 1996 as a way of stopping spam-email. There are a number of different proof-of-work systems and proof-of-work alternatives, like proof-of-stake.

Why is Proof-of-Work So Difficult?

As eluded to above, proof-of-work functions are designed purposefully to be difficult so that they prevent malicious behavior, such as to a miner who tries to add a bunch of fake blocks to bitcoin in rapid succession. Not only does proof-of-work protect digital currency against spammers, it prevents a single person from having control over which block is added to the ledger next. As an additional benefit, it gives value to the coins and the mining process by requiring that each coin created has a little blood, sweat, and tears behind it.

Pitfalls of Proof-of-Work

Proof-of-work functions have one big pitfall — tons of computing power is needed to solve the puzzles. This computation has no value outside of protecting against spammers and keeping cryptocurrency systems running clean. This means that the process of mining cryptocurrency with proof-of-work is horribly wasteful.

Proof-of-Work Alternatives

Given the wasteful nature of proof-of-work, it’s generally agreed that it isn’t the ideal long-term solution for cryptocurrency. As such, there are a few potential alternatives, including one that people are more excited about called proof-of-stake.