What is Proof of Work?

Note: this article is intended as a simple introduction to the principle concepts of Proof of Work (PoW) blockchains. For simplicity and clarity, we’ll reference the Bitcoin network as our PoW example. We’ll offer resources for further reading throughout the article. Keep in mind that networks vary in their design and all consensus mechanisms can have highly complex, distinctive technical intricacies.

In the context of blockchain, a node is a computer that supports and secures the network by reviewing and validating transactions and other data. Depending on multiple factors, some nodes — commonly called “lightweight” nodes — have partial or recent chain data, and some are “full” nodes — with a full record of a blockchain’s entire transactional history. This article, by Cryptopedia, and this information from nodes.com, explains nodes in further detail.

The consensus mechanism is the way a particular network’s participants reach consensus.

Proof of Work (PoW) and Proof of Stake (PoS) are the most popular consensus mechanisms, but it’s worth noting that other consensus mechanisms exist, including:

• Proof of Activity (PoA),
• Proof of Authority (PoA),
• Proof of Burn (PoB),
• Proof of Capacity (PoC),
• Proof of Elapsed Time (PoET),
• Proof of History (PoH),
• Proof of Importance (PoI),
• Proof of Reputation (PoR)
• Pure Proof of Stake (PPos),
• Delegated Proof of Stake (DPoS),

Each mechanism seeks to solve problems generally related to security, speed, and/or scalability. Crypto.com offers an introduction to 10 consensus mechanisms including those mentioned above. Additionally, they take a deeper dive in understanding consensus in this more intermediate article.

Proof of Work blockchains like the Bitcoin network use financial incentives like block rewards and transaction fees to encourage miners to set up and maintain their computers/hardware to mine blocks and, subsequently, keep the blockchain operating and processing transactional data. Participants are called miners due to the work involved in running their nodes and the high level of mathematical computation (and energy) required to create and/or verify the blocks during consensus.

While the term mining is a bit misleading, it’s meant to associate the energy (computational power) used in processing the transactions (the miners’ proof of work) with the value (Bitcoin) they receive for their labor (energy) in the same way we associate precious metals as a reward for the traditional concept of mining.

A simple view of how a PoW blockchain like Bitcoin works.

Users create transactions which are sent to a mempool, where they await execution (verification) by the miners.

• a mempool (Memory Pool) is a temporary storage location for unprocessed transactions on the blockchain
• transactions in the mempool have been reviewed by nodes, but not yet included in a block

All miners participating in the network are working to create their own blocks. They pull transactional data from a mempool and begin compiling blocks. To mine a new block, miners must solve complex mathematical equations, known as cryptographic hash puzzles, or simply “hash puzzles”.

They must determine (through rapid guessing) a random number called a nonce. The term “nonce” stands for “number only used once”. The nonce, combined with the previous block header, is passed through a hash function helps the miner solve the complex cryptographic puzzle. The puzzle is, essentially, the miner’s challenge to find a hash number that’s less than the target value.

• A “hash function” is an algorithm that converts plain-text data into a fixed-length hexadecimal number. This is known as a “hash”. Hashing is secure because it’s impossible to reverse the process and reveal the original data.
• Bitcoin uses SHA-256 in its validation process. SHA stands for Secure Hash Algorithm. 256 reflects the final output — no matter how much content you supply, the fixed-length hexadecimal number (“hash”) will always be 256 characters.
• SHA-256 is part of the SHA 2 library of algorithms, originally created by the National Security Agency (NSA) and National Institute of Science & Technology (NIST)

A target value is a threshold (determined by mining difficulty) that the hash must be lower than for a proposed block to be added to a chain. This is the puzzle the miners are trying to solve. When a miner has found an answer, they broadcast it to the network for other miner nodes to review and verify for correctness.

• their efforts to verify are drastically lower than the miner’s computational “work” because they are confirming the answer, not re-solving the puzzle.
• Each block’s cryptographic solution is called a block hash. The block hash is included in all previous, validated blocks. We can think of a block hash like a specific reference number. It serves as a record of the “work” done by the miner. All new blocks contain the block hash of the previous block (hence the “chain”).

Assuming a majority of the network verifies, consensus is reached, and new block is “mined” and added to the blockchain.

• miners will remove the transactions from this confirmed block from their own blocks
• miners will pull new, additional transactions from the mempool and continue to build new blocks and attempt to solve the new (block’s) cryptographic puzzle.

Let’s look at the diagram below for a visual recap:

Fun Fact: The level of mining difficulty — the level of computational power to solve these puzzles — is automatically adjusted by the network so that a new block is produced approximately every 10 minutes. The system adjusts based on the number of miners competing to discover blocks at a give time. The difficulty is adjusted by increasing or decreasing the amount of zeroes at the front of the target hash. More miners joining the network = increase in the level of difficulty, and vice versa.

Miners can – and do – come together to combine their computing power to have increased changes to solve the mathematical equation and earn the block reward. These groups are called “mining pools“. Block rewards are shared across the mining pool proportionately according to how much computational power each miner supplied to the pool.

Some of the larger bitcoin mining pools include: BTC.com, F2Pool, AntPool, Poolin, Slush Pool, among others. Each mining pool combines the efforts of thousands of individual miners across the world, all contributing to the network. In the case of Bitcoin, a miner (or mining pool) would receive 6.25 BTC (until the next halving) + the transaction fees from that block as a financial reward for each block they successfully mine.

The financial incentives (block reward + transactional fees) encourages miners to contribute honestly to the network.

Additionally, one of the security features of PoW networks like Bitcoin is that they require nodes continue to add new blocks to the longest chain; the chain with the largest amount of computation. This creates a protective layer against an actor “hijacking” the chain for an extended period of time.

How would that work?

Let’s assume a malicious actor wanted to take over a Proof of Work blockchain like the Bitcoin network. While they would indeed have the possibility to solve a single cryptographic hash puzzle and submit a new block for the nodes to approve (consensus), the malicious actor would have to continue to successfully find the correct hash number for each consecutive block before any other miner node and continue to maintain the longest chain — the largest, continuous (proof of) work.

This is, for all intents and purposes, impossible due to mathematical improbability and extremely high financial costs; it would take an immense amount of (expensive) computational power to achieve this goal, and virtually impossible to continue mining consecutive blocks successfully.

Bitcoin.org explains this as well in their FAQ section:

The Proof of Work is also designed to depend on the previous block to force a chronological order in the blockchain. This makes it exponentially difficult to reverse previous transactions because this requires the recalculation of the proofs of work of all the subsequent blocks. When two blocks are found at the same time, miners work on the first block they receive and switch to the longest chain of blocks as soon as the next block is found. This allows mining to secure and maintain a global consensus based on processing power.

Read more from their FAQs here. For more context, YouTube channel 3Blue1Brown does a good job of explaining this in the context of the Bitcoin network in their video. Watch it here.

Bonus Term: 51% Attack
A 51% attack, as the name implies, is a scenario in which 51% (more than 50%) of a blockchain’s nodes are controlled by one entity or group. If this occurs, the blockchain could be at risk of manipulation. This is because the controlling entity could use their majority to influence or corrupt the transactional data within the blocks.

Proof of Work is generally considered to be one of the more decentralized and, subsequently, secure types of consensus mechanisms as it’s the oldest and most battle tested. However, some growing barriers to entry, like high start-up costs for miners, may give rise to the argument that it pushes PoW towards some centralization because fewer organizations or individuals can afford the costs of mining equipment and computational power.

Additionally, scalability tends to be a concern for large PoW blockchains, like Bitcoin, although layer-two solutions are being conceived in various ways, by various teams, to bring increased speed and extended functionality to PoW networks like Bitcoin.

Strategic Advantages of Proof of Work

• Typically smaller blockchain size makes it easier to run a node and participate
• Typically more decentralized token ownership due to mining
• Typically less inflationary tokenomics over time
• More decentralized by design

Disadvantages of Proof of Work

• Cost prohibitive due to expensive mining hardware
  • Additionally, miners have no guarantee of profitability
• Can be technically complex to set up and maintain mining tech/hardware
• Expensive to upgrade to new mining tech/hardware
• Slower network upgrades and governance over time
• Concerns over environmental impact and sustainability
• Typically slower network as mining power focuses more on solving mathematical equations vs. processing transactions, which introduces scalability concerns.

What are some well-known Proof of Work blockchains?

Bitcoin, Ethereum (pre-Merge), Litecoin, Monero, Zcash, Ravencoin, among others.