Published Jun, 08 2023

What is Proof of Work (PoW) in Blockchain & Bitcoin?

Proof of Work, typically shortened to PoW, is a consensus mechanism used by blockchains to prevent double-spend or 51% attacks on the network. For example, Bitcoin uses PoW to create new blocks for its blockchain.  Of course, there’s much more than that involved in the PoW protocol, including the mining process people love to discuss. […]

Proof of Work, typically shortened to PoW, is a consensus mechanism used by blockchains to prevent double-spend or 51% attacks on the network. For example, Bitcoin uses PoW to create new blocks for its blockchain. 

Of course, there’s much more than that involved in the PoW protocol, including the mining process people love to discuss. So keep reading to learn more about Proof of Work, what it is, and why it matters.

What is Proof of Work?

Proof of Work is a protocol that crypto miners use. This process of mining Bitcoin and other - but not all - cryptocurrencies requires nodes (computers) that compete to be the first to accurately solve a complex equation, which confirms all transactions on the block.

Miners first to solve the algorithm receive rewards in the form of crypto. As a result, the Proof of Work protocol creates value for the cryptocurrency, ensuring the information contained within each block is accurate, trustworthy, and valid. Rewards for miners act as an incentive to confirm accurate data while rejecting false transactions.

The beauty of Proof of Work is that it does require a central financial bank or institution to back it. PoW uses the blockchain to create trust amongst unknown users, all using the same consensus mechanism.

How Does PoW Work?

Now that you have a basic understanding of Proof of Work, let’s jump into the nitty gritty of how it works. For the purposes of this example, we’re going to use Bitcoin as our crypto of choice. Let’s say you send someone one whole Bitcoin. Pretty generous of you to do so.

This transaction of you sending Bitcoin is stored on the blockchain. The timestamp is recorded, as is the amount, the sending address, the receiving address, and other pertinent information. All this information is communicated across the Bitcoin network, where miners use their computers to validate the transaction.

Miners compete with one another to solve the mathematical algorithm, with the first to do so successfully receiving the reward. Once the majority of nodes on the network agree that the miner has correctly solved the algorithm, consensus is reached.

Rewards come in the form of transaction fees, which are drawn from the transactions that take place on the network. Once the block is confirmed and added to the existing chain, it becomes a permanent part of the network’s blockchain.

Since the inception of Proof of Work, other consensus mechanisms have followed, including Proof of Stake, Proof of Capacity, Proof of Authority, and many others. These protocols create a way for transactions to occur without the need for a third party while guaranteeing the integrity of the system. 

Why Do We Need Proof of Work?

We briefly touched on the importance of Proof of Work and its role in the crypto industry, but its most important feature is that it creates trust in a trustless market. As crypto miners compete for the rewards that come with successfully solving the next block, they’re all implicitly agreeing not to manipulate the network.

As each block is completed, the difficulty of the algorithm becomes more difficult, which prevents excessive mining from taking place. As a result, miners are incentivized to continue mining on the network.

With Proof of Work, an alternative financial market is created, one that doesn’t require the use of traditional financial institutions. PoW is necessary to provide security, prevent fraudulent transactions, and enable trust across the blockchain.

Additionally, PoW is used to provide security to the network’s transaction history, which is what makes the blockchain immutable. Lastly, with Proof of Work, a distributed clock is created. This allows miners to enter and leave the network freely while continuing their mining operations.

Proof of Work in Action

Anytime you buy, sell, send, or receive Bitcoin, you’re putting the Proof of Work protocol into action. A great way to do this is by purchasing Bitcoin and adding it to your wallet. You can do this at any of Bitcoin Depot’s thousands of Bitcoin ATMs (BTMs). They’re fast, secure, and easy to use. Just be sure to bring some cash with you.