What Is Proof of Work? How Crypto Mining Achieves Consensus

Nodes, mining, and especially Proof of Work (PoW) have all become popular buzzwords in the crypto landscape despite people rarely knowing what they mean. 

The truth is, though, Proof of Work and all the aforementioned elements that make it up make the first cryptocurrency, Bitcoin (BTC), a true form of digital gold. 

Suppose Bitcoin founder Satoshi Nakamoto hadn’t conjured up this idea in 2008. In that case, it’s highly unlikely cryptocurrency could have ever even taken off in the first place, so it’s well worth learning about. 

What Is Proof of Work?

Any form of currency, including cryptocurrency, needs to hold value. To do that, there must be some way to encourage people to work hard to receive valuable tokens so they aren’t easy to acquire.

As a result, Satoshi Nakamoto created Proof of Work, which can almost be seen as a digital imitation of gold mining. Essentially, people put in the work to ‘mine’ crypto, and their efforts are rewarded.

Digital mining is technical and demanding, though, as it requires the miners to try and complete complex puzzles and computations as part of the process, which is where the ‘work’ comes in. 

Mining and verifying a transaction go hand in hand, so when a person is mining, they are simultaneously confirming data, which will later be added to the blockchain.

So, to be clear, mining involves processing a transaction in exchange for cryptocurrency and is essentially a system that rewards miners for helping keep the flow of transactions safe and steady.

Where Did it Come From? 

Cryptocurrency was first introduced by David Chaum in the 1980s , but he struggled to put his ideas into practice due to the lack of a consensus mechanism, such as Proof of Work. 

The earliest example of Proof of Work was used in David Back’s Hashcash project. Still, it would soon be expanded upon by computer scientist Cynthia Dwork in her 1993 paper “ Pricing via Processing or Combatting Junk Mail .” At this point, though, Proof of Work was only being tested for emails, not cryptocurrency. 

It wouldn’t be until 2008, with Satoshi Nakamoto’s Bitcoin (BTC) white paper’s arrival, that Proof of Work would finally be successfully incorporated into the crypto landscape. The Bitcoin blockchain would be the first to use proof of work, and it wouldn’t be long before many other developers began using it as a template for their blockchains. 

Why Was Proof of Work Needed?

The Proof of Work system enabled crypto holders to pass, send, receive, and store their tokens safely and securely, but there were two other key issues that it was designed to solve.

The first is the issue of double spending. Since cryptocurrency is data and not a tangible object like fiat currencies, bad actors have been finding ways to duplicate and use it to execute multiple payments without facing any penalties.

This is immoral, but it also would have tarnished the reputation of cryptocurrency and made it seem more like a get-rich-quick scheme than a legitimate form of currency. Proof of Work negates this problem by setting up a rigid verification system.

The second issue concerns decentralization and, more specifically, allowing decentralization to flourish and even work in the first place. 

Being decentralized means that users don’t need to rely on banks to verify transactions, but it also makes a blockchain unhackable since there’s no central authority to break into. Additionally, every transaction on the network will be fully accessible for everyone to see, preventing financial foul play and keeping users’ wallets completely anonymous since they aren’t associated with an ID, as they would be with banks.  

Proof of Work in Practice

So, we know that the Proof of Work algorithm is a mechanism that verifies transactions, but how exactly does it go about achieving this?

Here’s the full step-by-step procedure, from when a transaction is placed to when it’s confirmed and linked to the blockchain:

1. New incoming transactions are placed into a block, which are small collections of transactions that eventually become part of a chain on the blockchain.
2. The transaction is sent out to a group of nodes and peer-to-peer computers on the network that agree on the transaction’s legitimacy.
3. Then, it’s time for miners to get involved. Before they can start mining, miners must compete to solve a mathematical puzzle to see who is worthy enough to start mining.
4. The challenge winner will then be granted the opportunity to mine the block, which, in turn, will verify the transaction. They will then be compensated in Bitcoin.
5. The block is finalized and connected to the next block, the last connected to the blockchain. It, therefore, becomes part of the ledger as the transaction is officially set in stone on the network.

What Is Mining? 

Mining refers to creating new crypto through verifying transactions on a network. 

This is why validators on the Proof of Work model earn the name ‘miners’ since they verify transactions on the blockchain network in exchange for what is known as Miner Block Rewards. 

In the early days of Bitcoin, mining was usually attempted with regular computer CPUs, but it was found that these were taking too long and couldn’t keep up with the complex cryptography puzzles. GPU and ASIC mining are the more popular methods nowadays, but they use tremendous computing power.

To become a miner, one must first enter a mining pool and install a mining client. Some of these pools will provide guidance on the Proof of Work procedure and how it works, while others expect the miners to come prepared. 

Miner Block Rewards

Miners will only earn a reward for their efforts once other participants on the network have confirmed that their block is accurate and valid. 

After that, they will be compensated with 3.125 BTC newly generated Bitcoins. This amount will be cut to half with each Bitcoin halving , which occurs roughly every four years.

This form of crypto compensation is expected to keep up until 21 million Bitcoins are circulating on the network. This is to protect the value of Bitcoin from inflation if too many tokens were to be made. After this point, miners are expected to be rewarded through transaction fees instead. 

Is Proof of Work Old Fashioned? 

While Proof of Work is still fully functional and remains a crucial component for decentralization, it’s sometimes struggled to keep up with modern-day expectations. 

Energy consumption is the main example of this. There’s a lot of data showing how frequent Bitcoin mining can use up as much electricity as entire countries, and considering miners are working around the clock, it’s easy to see why it’s often seen as harmful to the environment. 

There was even an attempt in 2022 by Erik Thedeen in the European Parliament for the EU to ban Proof of Work entirely to save on renewable energy. 

Another problem Satoshi Nakamoto could never have expected when he set out Proof of Workall those years ago was centralization, specifically in mining communities. Over time, mining operations have become centralized in a few major outfits. Though they aren’t technically a ‘third party,’ it still implies that Proof of Work potentially can’t uphold its decentralized principles for long. 

Issues such as these have been plaguing Proof of Work blockchains for a while, and it’s caused some networks, such as Ethereum (ETH) , to jump over to different consensus algorithms, primarily Proof of Stake (PoS). 

Still, it’s important to recognize that the financial freedom PoW offers is unlike anything seen before it, and the fact it’s survived this long proves its viability, though how long it’ll last is uncertain. 

The financial freedom PoW offers is unlike anything seen before it. Still, developers have already begun working on upgraded versions of the mechanism that are designed to resolve some of its glaring problems.

Proof of Useful Work (PoUW) – The Future of PoW?

The biggest example is Proof of Useful Work (PoUW), a concept put forward by Internet Computer , a general-purpose blockchain known for its Web3 experiments and projects. 

Under Proof of Useful Work, the competitions that miners must go through to verify a block are structured slightly differently. Rather than trying to outdo one another with computer power, their goal is to solve the block puzzle using the same amount. 

While this is still energy-intensive, it encourages miners to be more restrictive in how many computing resources they utilize during the verification process. It also helps to prove who’s the most efficient of the group since everyone will be on an equal playing field. 

Proof of Useful Work is still in its early stages and is yet to see approval or recognition from the wider crypto community. Despite that, it demonstrates that developers are still out there seeking ways to remodel the PoW algorithm to be more applicable to the modern age of cryptocurrency. 

On the Flipside

• It’s now been over a decade since Proof of Work was formally introduced, and in that time, it has begun being surpassed by other models such as Proof of Stake. 
• As proof of this, the major crypto network Ethereum switched from Proof of Work over to Proof of Stake in 2022 as it felt as though the previous model was struggling to keep up.

Why This Matters

Proof of Work is the giant cog in the blockchain machine that keeps everything running smoothly. Crypto investors expect all of their transactions to be safe and secure, as they should, so though it certainly has problems, Proof of Work still deserves credit for making decentralized networks a reality. 

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