Proof of Work: Definition, How It Works

• Proof of work enables Bitcoin transactions to to be confirmed and recorded without a central authority.
• It disincentivizes attacks on a crypto’s blockchain by making verifying transactions expensive.
• Proponents of proof of work contend it’s more secure than other mechanisms like proof of stake.
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Bitcoin’s most notable feature is its decentralization. It operates securely without the involvement of a central authority. A distributed network of users store and update the digital ledger that records transactions — called the blockchain — on their own computing hardware.

However, this raises an important question: Without a central authority to act as a final arbiter, how does Bitcoin ensure that nobody manipulates the blockchain for their own ends? The answer is proof of work.

Proof of work is a consensus mechanism used to confirm that network participants, called miners, calculate valid alphanumeric codes — called hashes — to verify Bitcoin transactions and add the next block to the blockchain. It does so by having other participants in the network verify that the required amount of computing power was used by the miner that is credited with calculating the valid hash. 

What role does proof of work play in cryptocurrencies?

proof of work is all about creating a positive incentive for people to invest in the resources it takes to add valid blocks to a cryptocurrency’s blockchain.

“The challenge in a blockchain like Bitcoin is to maintain an agreed transaction record without having a central authority,” says William J. Knottenbelt, a professor at Imperial College London’s Department of Computing. “So the key question is how a group of peers of similar status can agree upon which of them should be authorized to add to the common transaction record.”

The process of calculating a hash is intentionally made extremely computationally difficult. By forcing participants to invest significant amounts of money in computing resources, the proof of work mechanism creates a disincentive against trying to undermine the blockchain’s integrity. It also reduces the potential for a single Bitcoin being spent simultaneously more than once — known as double spending — which would destroy confidence in the cryptocurrency.

“Proof of work is how miners (block publishers) prove to the world that they have put in the necessary work to create a well-formed block of transactions to add to the blockchain.” says Knottenbelt. “From the miner’s perspective they are turning the energy they put into the search for valid blocks (for which they typically purchase special high-performance hardware) into money (in the form of the rewards they obtain from coinbase rewards and transaction fees).”

Bitcoin mining is essentially a competition where miners are all racing to be the first to solve extremely complex cryptographic puzzles, enabling them to add the next block to the blockchain and receive payment in the form of new Bitcoins. The winning miner receives the reward only after the other systems in the network, through the proof of work protocol, verify that the solution is correct and valid.

This involves a serious amount of number crunching, with the equipment used by miners having to go through much trial and error before finding the correct hash.

“Proof of work uses a lottery mechanism — miners create candidate blocks of transactions (including a reward for themselves) which must satisfy several strict conditions,” Knottenbelt explains. “They then test to see if these conditions are fulfilled. Almost all of the time they are not and the miner has to go back and try again.”

It’s because most candidate blocks do not include the correct hash that so much work is involved in verifying Bitcoin transactions. And in fact, the difficulty of this process can increase or decrease, in order to ensure that new blocks are produced at regular intervals.

“The difficulty of the lottery is adjusted periodically so that if blocks are being produced too quickly then it becomes harder to satisfy the conditions necessary for producing a valid block and if the blocks are being produced too slowly then it becomes easier,” Knottenbelt adds.

Note: The parties involved in updating Bitcoin have a strong incentive to add to its blockchain because publishing of a valid block earns a reward of 6.25 bitcoins as well as the fees associated with any of the transactions included in the block.

Where did proof of work come from?

While proof of work is most associated with Bitcoin, its sources trace further back in time than 2008, when the pseudonymous Satoshi Nakamoto published the Bitcoin white paper. The concept has been around in the computing world since at least the early 1990s, and the term ‘proof of work’ is thought to have first surfaced in an article by computer scientists Ari Juels and Markus Jakobsson in 1999.

Note: The concept of using computational work to deter attacks was first outlined in a 1993 paper authored by Cynthia Dwork and Moni Naor, who sought a means of discouraging spam and denial-of-service exploits.