What is Proof-of-Work (PoW)?

Proof-of-Work scheme. Adapted from Ledger

Pros and cons at a glance

Who invented Proof-of-Work consensus protocol?

What cryptocurrencies use Proof-of-Work?

Understanding Proof-of-Work

  • Transaction grouping. As users sell and buy digital currency, their transaction data is pooled together into blocks.
  • Constant miners’ competition. Miners spend computing power and energy to solve laborious math problems. The first miner to succeed with acceptable proof of computational effort (hash) gets the right to process a new transaction block.
  • Block addition. Every block is added by a single miner. Once the processing is complete, they get native coins — a reward for investing in the hardware and energy.

Security based on computational power

Elements of Proof-of-Work. Adapted from Capital.com

Key aspects of Proof-of-Work

  • Computational puzzle. Also known as CPU cost function, client puzzle, or CPU pricing function, it defines the fundamental asymmetry of this system. While solving the puzzle is laborious, the results are easy to verify for other miners and clients.
  • Built-in incentives. Winning miners get crypto for allocating computational capacity to the network. How many coins they get is gradually changing. The Bitcoin rewards halve every 210,000 blocks, or roughly every 4 years. This event is known as the Bitcoin halving.
  • Proof of work. A block is valid when its production consumes a certain amount of computational power. The term work refers to the competition to solve arbitrary puzzles — a barrier to gaming the system. The winning miner adds the newest batch of data or transactions to the ledger. If other network participants confirm their output, the crypto miner gets their reward.

Hash function in Bitcoin transactions

Hash function applied to a Bitcoin transaction. Adapted from Forkast.news

Problems solved by Proof-of-Work consensus mechanism

Double-spend problem

Network fraud prevention

Mining difficulty and computing power

Rise in mining difficulty between 2018 and 2021. Source: Medium.com

Drawbacks of Proof-of-Work protocol

Environmental concerns

Scalability limitations

Centralization issues

Expensive participation

Transaction fees

Proof-of-Work vs. Proof-of-Stake

Key takeaways

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CoinLoan is a Crypto Lending Platform