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What is Proof of Work? Definition & Guide

By Laurel Tincher · October 11, 2021 · 4 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

What is Proof of Work? Definition & Guide

Cryptocurrencies are known for their high level of security — and in many cases, that security is made possible by a proof-of-work (PoW) algorithm. The proof-of-work consensus algorithm is currently used by Bitcoin, Ethereum, Dogecoin, Litecoin, and many other cryptos (although the Ethereum network is transitioning to a different algorithm known as proof-of-stake).

Proof of work largely serves to prevent double spending, which is when the same coins are spent more than once. Digital currencies are prone to double spending since they don’t have any material exchange — it can seem easy and tempting to forge transactions that are just numbers on a screen.

Proof of work and the blockchain keep track of every transaction to prevent this from happening. The algorithm is extremely secure and complicated, making it nearly impossible to double-spend Bitcoin and other PoW cryptocurrencies.

The concept of proof of work was originally developed to prevent denial of service attacks (DDoS) and spam emails, but in 2004 Hal Finney adapted it for use in blockchain digital currency networks. Bitcoin was the first cryptocurrency to put the idea to use.

Recommended: What Is Blockchain Technology and How Does it Work?

How Proof of Work (PoW) Works

Proof of work is basically what it sounds like: proof that work has been done. The “work” is the conversion of electrical energy into “weight” on the Bitcoin blockchain through the use of computing power and a complicated mathematical calculation. Overall, this work makes forging transactions on the blockchain prohibitively expensive and difficult.

The mathematical calculation involves a hash function, which in turn generates a long string of unique numbers. This helps validate transactions and create the next block on the blockchain. Each block contains information about a specific Bitcoin transaction. As the transactions are validated and recorded on the chain, this ensures that double spending hasn’t occurred. Once information has been stored on the blockchain, it cannot be changed or deleted. This helps to keep the private keys of Bitcoin owners secure and anonymous.

Miners’ Role in Proof of Work

Bitcoin miners (nodes) run specialized machinery that works to solve the equation as quickly as possible, and they are rewarded with new bitcoins depending on how much computing power, or hash power, they contribute to keeping the network running.

The objective of PoW is to extend the blockchain. The miner that creates the longest chain gets the reward as well as the transaction fees contained in the block. The best way to solve the calculation is through trial and error, so the more computing power a miner can put into doing as many trials as possible as quickly as possible, the more likely they are to win the block reward.

Why Proof of Work is Needed

Proof of work ensures that double spending doesn’t occur in digital asset networks. It provides security and a record of transactions as well as an incentive for miners to keep the network running.

Proof of work is also needed because Bitcoin has no central authority (vs. a bank, for example). A central authority would keep track of transactions as well as issue new bitcoins to the network. Instead of this, the network of miners keeps track of the blockchain.

Proof of work also adds value to Bitcoin because it shows that people are willing to convert energy, a material resource, as well as fiat currency, into the production of the cryptocurrency. This provides more confidence for those who are interested in investing in Bitcoin.

Pros and Cons of Proof of Work

There are several reasons why PoW is used for Bitcoin and other popular cryptocurrencies, but there are arguments against it as well.

Pros of Proof of Work

•   PoW helps keep the network secure

•   It prevents double spending

•   It adds value to the network through the use of energy

•   It is an integral part of the decentralized authority system of the network

Cons of Proof of Work

•   It requires computational power, which uses a significant amount of electricity

•   PoW has low performance capacity for the execution of on-chain transactions

•   Getting involved in mining requires a large upfront equipment cost and ongoing maintenance and electricity costs

•   There is a risk that miners may group together to attack the network, undermining its decentralized nature

Which Cryptocurrencies Use Proof of Work?

Proof-of-work is the most commonly used algorithm for cryptocurrency networks. However, some cryptocurrencies use other algorithms, such as proof of stake. The following cryptocurrencies use proof of work:

•   Bitcoin (BTC)

•   Ethereum (ETH) (for now until it moves to proof-of-stake)

•   Bitcoin Cash (BCH)

•   Litecoin (LTC)

•   Monero (XMR)

•   Dogecoin (DOGE)

•   Ethereum Classic (ETC)

•   Bitcoin SV

•   Dash

•   Decred

Proof of Work vs. Proof of Stake

Since PoW has some downsides, developers have been working on many other types of consensus algorithms for cryptocurrency networks. One of the most anticipated is proof of stake (PoS).

Rather than miners, PoS uses validators who are chosen to create blocks based on how many coins they hold, rather than having to compete to create the blocks. Proof of stake rewards validators that hold the most coins with the ability to mine blocks and validate transactions.

The benefit of PoS is that it uses a lot less electricity. However, PoS rewards nodes for holding tokens, resulting in hoarding rather than use of the crypto. PoS is also vulnerable to 51% attacks, where an individual crypto miner or group of miners gets control of more than 50% of a network’s blockchain.

The Takeaway

Proof of work is the original way to secure blockchains and protect cryptocurrency from being double-spent and potentially devalued. Bitcoin uses the PoW consensus algorithm, as do a number of other cryptocurrencies.

If you’re interested in trading cryptocurrencies, SoFi Invest® makes it easy. You can choose from more than 20 different cryptos, including Bitcoin, Solana, Enjin Coin, Cardano, Litecoin, and more.

Find out how to start trading crypto with SoFi Invest.

Photo credit: iStock/MesquitaFMS


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