Proof of Work in Crypto: Definition, Examples & More [2023]

Cryptocurrency and blockchain are often misunderstood, but their impact on the world as we know it since their inception in the late 2000s has been undeniable.

Everyone’s heard of Bitcoin and what a great investment it has been for early adopters, but Bitcoin wouldn’t be what it is without proof of work.

The progenitor of today’s thousands of cryptocurrencies was created at a time when the excesses and weaknesses of the global financial industry were being exposed to all and sundry. Giant banks such as Bear Stearns and Lehman Brothers collapsed, but far worse, millions lost their homes.

Why was Proof of Work Invented?

The failures of finance are often covered up and rarely come to light. In this case, though, household names like Christian Bale, Brad Pitt, Steve Carrell, Margot Robbie, and Ryan Gosling were drafted in to explain the misdeeds of bankers, rating agencies, and other financial institutions in the cult classic “The Big Short.”

Bitcoin founder Satoshi Nakamoto made a heavy-handed reference to this global financial crisis by including the Times newspaper headline “Chancellor on the brink of a second bailout for banks” in Bitcoin’s genesis block.

What is Proof of Work?

A financial system, distilled down to its most basic form, is a ledger. Transactions made between participants in the system are recorded on the ledger, and thus a record can be kept of what amounts have moved from user to user.

That’s exactly what Bitcoin is. It’s a network of users, or wallet addresses, more specifically, that keeps track of the transactions made by the different addresses. Every ten minutes or so, the latest transactions are grouped together and recorded.

This group of transactions is called a block.

In addition to the transactions that make it up, a block also contains a cryptographic hash of the previous block’s contents. This is why it’s a blockchain, with each block linking to the next.

This feature also makes the blockchain immutable since if you try to change a transaction after it’s recorded, the cryptographic hash of the block also changes and breaks the chain.

This hash is a 64-digit encrypted hexadecimal number, which is difficult to solve. It takes computers around ten minutes to figure it out.

Once one computer has solved this cryptographic puzzle, it’s quite easy for the others to “check the math” on the solution and verify it. This is, in effect, network consensus—one node proposing a solution and the rest voting on it. Thus, proof of work is called a consensus mechanism since it allows a decentralized system to achieve consensus.

The entire process of putting computers toward solving the cryptographic hash of the blocks on a blockchain is the basis of proof of work and is called mining.

Proof of Work & Mining

Crypto mining, or proof of work mining, is a big industry. This is because most cryptocurrencies, including Bitcoin, have a mechanism called a block reward. To put it simply, the computer that guesses the aforementioned hash gets a reward.

In Bitcoin’s case, this reward is pretty sizable, although it does reduce every few years via a process called Bitcoin halving.

At the current prices of Bitcoin, it’s not hard to see why the chance of winning a few BTC every ten minutes has created a massive industry. All of the miners who do this, or rather the computers (including specialized machines called ASICs) they have put to the task, compete with each other for the block reward.

Proof of work mining is competitive and becomes a race between the miners with the most computing power. This computing power tends to be measured in hash rates, and in the case of Bitcoin, the hash rates needed to be a competitive miner are quite incredible.

For this reason, miners often group their resources and form what are called mining pools. These pools can levy an incredible amount of hashing power—a Bitcoin mining pool called FoundryUSA, for instance, was generating 89.81 quintillion hashes per second in February 2023.

This is a far cry from Bitcoin at genesis, when Bitcoin miners were hobbyists putting their CPUs to work. There are still some currencies mined on CPUs, such as Monero, and plenty of ASIC-resistant cryptocurrencies (Ethereum used to be one) are mined on GPUs.

Examples of Proof of Work

It should go without saying by now that Bitcoin is the perfect example of proof of work, but plenty of other blockchains use the same consensus mechanism. Here are some:

#1. Litecoin

Often viewed as Bitcoin’s younger sibling and as the digital silver to Bitcoin’s digital gold, Litecoin is a fork of Bitcoin that dates back to 2011. At the time, Bitcoin was being mined using GPUs rather than CPUs as originally intended, which was a concern for some.

This led to Litecoin being forked from the source code of Bitcoin Core and implementing the then GPU-resistant Scrypt encryption. Its founder is Charlie Lee, also known in some quarters as “Chocobo.”

#2. Dogecoin

If ever a joke had to be taken seriously, this is it. Dogecoin was created purely for laughs by Billy Markus and Jackson Palmer, but the OG dog coin has transcended memes. It is regarded by some as a legitimate investment vehicle.

Its blockchain was launched as a hard fork of Litecoin, but it doesn’t have the same sort of supply cap that Bitcoin and Litecoin do.

#3. Monero

Perhaps infamous for its role as cryptocurrency’s premier “privacy coin,” Monero is all about anonymity. Bitcoin transactions are very easy to trace, making it a law enforcer’s dream, but Monero masks the addresses of senders, recipients, and even the amount of coins being sent.

#4. Ethereum Classic

Ethereum itself now uses “proof of stake,” but most of its forks still use proof of work. Ethereum Classic is one of the first of these, dating back to the infamous hack of the DAO.

The Ethereum community voted to hard fork the chain, rolling back the effects of the hack. Ethereum Classic is that other fork, and its community consists of hard believers in immutability, preaching that “code is law.”

#5. Bitcoin Cash

Bitcoin remains the premier crypto, but it’s arguably slow and expensive to use. Bitcoin Cash was 2017’s hard forked answer to this same complaint, representing a faction of developers willing to increase the size of the chain’s blocks to improve performance.

#6. Ergo

A rare bird in that it’s a newer proof of work blockchain, Ergo was launched as recently as 2019. It’s also unique in the fact that it launched with a small allocation toward ecosystem development, but the rest—over 95%—of the coin is in the hands of the public.

Often considered part of the wider Cardano ecosystem, Ergo is research-focused and extremely functional, able to support various decentralized applications and smart contracts. It’s ASIC-resistant and mined on GPUs, and it uses a UTXO (unspent transaction output) based on that of Bitcoin.

Advantages of Proof of Work

Proof of work is the original consensus mechanism as far as blockchain technology is concerned, and as detailed above, it is still in widespread use. Here’s why:

• Resistance to double-spend attacks. Digital currencies would have been in full force well before Bitcoin were it not for the ‘double spend’ problem. Actual cash can’t be spent more than once since you have to hand over the note—but a digital currency could be spent multiple times like copying and pasting. Proof of work prevents that by requiring miners to verify blocks.
• Difficult to overwhelm. Given the amount of computational power available on major proof of work blockchains like Bitcoin, it’s almost impossible to carry out spam attacks or take over control of the network. The only feasible way to do this is to somehow take over the major mining pools and carry out a 51% attack.
• Tangible effort is rewarded. Proof of work miners can only collect block rewards if they devote resources (computing power and energy) toward the network. While the computations being performed are meaningless outside of the hashing process itself, proof of work doesn’t “create coins out of thin air” in the way proof of stake is often accused of.
• Trustless and decentralized. If you’re using the traditional banking system in any way, you’re forced to put your trust in that system. It’s the bank’s system that decides how much money’s in your account or whether your cheques are clear. With a proof of work blockchain, the miners record your transaction and then need to reach a consensus on whether it was recorded correctly.

Proof of Work Challenges

Let’s take a look at some of the disadvantages of proof of work and the challenges facing it:

• Energy consumption. Proof of work often gets a bad rap because the energy usage of Bitcoin mining is often compared to that of entire smaller nations. While that’s true, its traditional competitors in gold and the traditional banking system consume much more.
• Bad PR. When the coronavirus pandemic triggered the growing trend of working from home, demand for PC components, including GPUs, took off. So did the prices of GPU mineable proof of work cryptocurrencies like Ethereum, meaning that miners were also buying GPUs in bulk. This led to a very difficult market for PC enthusiasts and gamers, although GPU sellers were happy to take full advantage.
• Mining centralization. Thanks to the aforementioned need for miners to form pools to stand a chance of making any return on investment, the blockchain gets centralized. These mining pools are a major liability, since it would only take the top two pools to collude to compromise the network.
• Decision making. Miners are also a problem because the blockchain relies on them to propagate. Without miners to mine blocks, there’d be no blockchain—a tricky situation since the miners themselves are motivated only by revenue and profit. They, therefore may not be relied upon to make decisions in the best interests of the network as a whole.

Proof of Work vs. Proof of Stake

Proof of stake is the other major consensus mechanism among major blockchains. Most newer blockchain projects tend to gravitate toward proof of stake consensus, and Ethereum switched from proof of work to proof of stake in 2022.

The main difference between the two consensus mechanisms is that proof of work requires node operators, or miners, to deploy computational power toward the network. This could be in the form of ASICs, GPUs, or even just CPUs. Whatever the device, it costs money.

On the other hand, proof of stake requires node operators to have skin in the game. That is, they first have to acquire a certain amount of the coin in question (at least 32 ETH in Ethereum’s case) before they set up their node. The node itself could simply be a single server.

Then, the node operator, referred to as a validator rather than a miner, bonds that amount of coins to the protocol via a smart contract. If they then misbehave, these coins are confiscated. If they validate transactions properly, they can be chosen as a block producer, proportional to how many coins they “staked.”

In that sense, proof of stake ties the crucial network participants much more closely to the protocol while also eliminating the energy dependence of proof of work. On the other hand, the block rewards given to validators and stakers are often regarded as being created out of thin air since not as much tangible work is being done to earn them.

The Future of Proof of Work

As mentioned, many new blockchain protocols are electing to use consensus mechanisms like proof of stake, perhaps thanks in part to the barrages of “FUD” thrown at proof of work related to energy consumption.

This may be an unfair criticism given that proof of work developers are always trying to optimize, and proof of stake remains untested to a large degree. While it’s true that proof of stake doesn’t suffer from the same sort of mining centralization, one only needs to look at wallet wealth distribution among many proof of stake chains to see that problems exist there too.

While proof of work does appear to have been pushed to the wayside, it’s not out for the count just yet. A crippling failure of proof of stake, in general, is hard to imagine, but if the corporate media can find a different ax to grind, proof of work’s qualities may yet reach a wider audience.

Proof of work has been around for a long time, and while it has its detractors, it won’t go away anytime soon.

Key Takeaways

Proof of work is a secure consensus mechanism for distributed ledger technologies that relies on network participants to perform computations. This creates an element of tangible work, and the block rewards on blockchains like Bitcoin require a lot of computation to unlock.

Crypto mining has been a hot topic of late, especially given the environmental criticism of it in the mass media. It certainly has challenges, but it remains a proven method to bring a massively decentralized network into consensus.

The work performed by the computers hard at work mining cryptocurrencies like Bitcoin may certainly be regarded as a waste. By that same logic, bankers in their ivory towers, along with the horrifying support network they require, including private islands and jets, buildings in every city, and an inordinate number of people and computers adding zero value, are much worse.