Proof of Work (PoW) Definition

Written by Sean GraytokUpdated: 19th Sep 2021
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Proof of Work is the melding of the physical and digital worlds. While it has various applications, like combatting spam or enabling two-factor authentication, it is best known for its role in securing the Bitcoin Blockchain.

This article will define proof of work and explain its critical role for Bitcoin.

What is Proof of Work (PoW)?

Proof of Work is a decentralized mechanism that Bitcoin and other cryptocurrencies use to reach a consensus on the blockchain.

Bitcoin is decentralized and does not have third-party oversight to process and verify transactions made between peers or prevent someone from spending bitcoin they do not have.

Therefore, a system is needed for a decentralized network of computers to agree with one another that a given transaction, or a block full of transactions, is in fact valid.

Proof of work achieves this by requiring Bitcoin miners to solve arbitrarily complex cryptographic puzzles that require a not-insignificant amount of computing power to effectively add a block to the blockchain.

In addition to enabling decentralization, PoW contributes to the security of Bitcoin. A block of transactions can’t be confirmed until PoW is shown, and Bitcoin’s encryption (SHA-256) ensures that there is only one ‘solution’ to the given block’s puzzle, so miners are incentivized to act rationally, or their invalid block will be rejected by the network.

But what exactly is this puzzle the miner is solving for? And why does it require so much work?

Understanding Proof of Work

The Bitcoin Blockchain is a public ledger synonymous with being “distributed” across the network. Each participant in the network, or node, keeps a copy of Bitcoin’s history to detect tampering with previous transaction data.

To prevent nefarious actors from altering the ledger, Bitcoin uses a hash function known as SHA-256 that processes a given data set and generates a unique output called a hash.

A hash is a long string of fixed length numbers that are deterministic to the input data, which contains the information describing transactions and other data we’ll discuss later.

Each block has a unique hash, and each new block contains the previous block’s hash, thus forming a chain of blocks, i.e., blockchain.

Therefore, an alteration made to a previous block would invalidate all of its subsequent blocks, which would shorten its chain and be ignored by the network.

Back to hashes: putting known data into the SHA-256 function and generating an output does not require a significant amount of work — your phone could do it.

So the Bitcoin protocol added a piece of ‘unknown’ data to the input that miners must find by brute guesswork. This unknown data is an integer value called a “nonce” or a “number only used once.”

Guessing the nonce does require enormous amounts of computational energy. A mining rig will make trillions of guesses each second to guess the nonce.

Miners prove that they’ve done work when they successfully guess this nonce, that when added to the known input data, results in the block’s hash that is less than or equal to the target hash.

The target hash is how the protocol adjusts mining difficulty — or how challenging it is for a miner to mine a block.

A smaller target hash increases the mining difficulty because it reduces the number of guessed hashes that are less than it. It’s like lowering the bar in a limbo competition.

Example of Proof of Work

We’ll pull some data from a mined block and run through a proof of work example. Let’s look at block #700795that was mined on September 16, 2021:

Block #700795 golden nonce was 2,556,141,097 and was correctly guessed by the F2Pool mining pool.

When the nonce was added to the rest of the block’s data, it generated a hash 000000000000000000022375c59b0d3567a734c57e19d4fec7fd113ae8e202ec that was less than the target hash set by the difficulty level.

F2Pool had a 1 in 18.4 trillion probability of guessing the nonce that created this hash on its first iteration through the SHA-256 function.

In exchange for processing the 2,671 transactions contained in this block and conducting trillions of guesses to find the nonce, F2Pool received a block reward of 6.25 BTC and collected 0.10196084 BTC in transaction fees.

Proof of Work Summary

Now that we know the terminology, let’s revisit the key ideas of the proof of work and hear from Satoshi himself.

  • “Proof” = successfully finding the golden nonce — that when combined with the meta input data and pushed through the SHA-256 function — generates a hash less than or equal to the target hash
  • “Work” = hardware and software working together to make trillions of guesses to find the missing unknown data called a nonce

Here’s Satoshi on proof of work in the whitepaper:

“The proof-of-work involves scanning for a value that when hashed, such as with SHA-256, the hash begins with several zero bits. The average work required is exponential in the number of zero bits required and can be verified by executing a single hash.”

He also explains how proof of work secures the blockchain:

To modify a past block, an attacker would have to redo the proof-of-work of the block and all blocks after it and then catch up with and surpass the work of the honest nodes. We will show later that the probability of a slower attacker catching up diminishes exponentially as subsequent blocks are added.”

In the ‘Calculations’ section of the whitepaper, Satoshi walks through the probability of an attacker generating an alternate chain faster than the honest chain. Consider reading the whitepaper if you want to check his math.

Proof of Work Criticisms

Proof of work is why “Bitcoin uses a lot of energy.” Mining operations require substantial amounts of electricity to power and cool the systems needed to mine.

However, critics of bitcoin mining and PoW fail to mention that the majority of miners use renewable energy to power their operations.

The cost of energy is the primary expenditure for miners, so it’s in their best interest to find the cheapest energy sources.

It’s common for miners to localize around some kind of power plant and capture its energy that would otherwise be wasted.

When executed like this, it’s a mutually beneficial relationship for the miner, power plant, and environment:

  • Miner: cheap energy to mine and expand its margins
  • Power Plant: stays in regulatory compliance by reducing its emissions, all while receiving a revenue share when the miner earns a block reward
  • Environment: benefits from less net emissions entering the atmosphere because the miner sought out renewable energy sources

Energy consumption is one of the main criticisms of Bitcoin. But everything has its trade-offs — in this case, it’s energy for security.

Proof of Work FAQs

What is the difference between proof of stake and proof of work?

Proof of stake (PoS) is an alternative to proof of work (PoW) and is used as a consensus mechanism to validate blocks based on the amount of cryptocurrency the given validator holds. A PoS validator can only validate the percentage of blocks that is equal to the percentage of coins it owns. For example, a validator who owns 9% of the available coins can theoretically validate 9% of the blocks and receive 9% of the total transaction fees.

Will proof of stake replace proof of work?

The Ethereum protocol is switching from PoW to a proof of stake consensus mechanism for its Eth2 upgrade. The Ethereum community argues that PoS has better energy efficiency, lower barriers to entry, stronger immunity to centralization, and better scaling capabilities than the PoW system.

What is the purpose of proof of work?

The purpose of proof of work is for decentralized nodes across the Bitcoin network to reach a consensus. PoW prevents tampering with the blockchain because blocks cannot be changed without redoing the work. PoW contributes to Bitcoin’s security.

Is Bitcoin PoW or PoS?

Bitcoin uses PoW to reach consensus across its decentralized network. The Bitcoin community has opted for decentralization and security instead of the benefits associated with a PoS system.

Bottom Line: Proof of Work Definition

Proof of work advocates argues that it’s the optimal consensus mechanism because it maximizes decentralization and security.

Censorship-resistant and security are vital when 21 million bitcoin are on the line.

Sean Graytok
Sean Graytok

Sean Graytok is our Co-Founder and leading expert in investing and financial management. His work has been cited in leading industry publications, such as InvestorPlace and Business Insider. Sean is interested in the people and technologies that are improving the world.