DEFINITION of 'Proof of Work'

Proof of work describes a system that requires a not-insignificant but feasible amount of effort in order to deter frivolous or malicious uses of computing power, such as sending spam emails or launching denial of service attacks. The concept was adapted to money by Hal Finney in 2004 through the idea of "reusable proof of work." Following its introduction in 2009, bitcoin became the first widely adopted application of Finney's idea (Finney was also the recipient of the first bitcoin transaction). Proof of work forms the basis of many other cryptocurrencies as well.

BREAKING DOWN 'Proof of Work'

This explanation will focus on proof of work as it functions in the bitcoin network. Bitcoin is a digital currency that is underpinned by a kind of distributed ledger known as a "blockchain." This ledger contains a record of all bitcoin transactions, arranged in sequential "blocks," so that no user is allowed to spend any of their holdings twice. In order to prevent tampering, the ledger is public, or "distributed"; an altered version would quickly be rejected by other users.

The way that users detect tampering in practice is through hashes, long strings of numbers that serve as proof of work. Put a given set of data through a hash function (bitcoin uses SHA-256), and it will only ever generate one hash. Due to the "avalanche effect," however, even a tiny change to any portion of the original data will result in a totally unrecognizable hash. Whatever the size of the original data set, the hash generated by a given function will be the same length. The hash is a one-way function: it cannot be used to obtain the original data, only to check that the data that generated the hash matches the original data.

Generating just any hash for a set of bitcoin transactions would be trivial for a modern computer, so in order to turn the process into "work," the bitcoin network sets a certain level of "difficulty." This setting is adjusted so that a new block is "mined" – added to the blockchain by generating a valid hash – approximately every 10 minutes. Setting difficulty is accomplished by establishing a "target" for the hash: the lower the target, the smaller the set of valid hashes, and the harder it is to generate one. In practice, this means a hash that starts with a long string of zeros: the hash for block #429818, for example, is 000000000000000004dd3426129639082239efd583b5273b1bd75e8d78ff2e8d. That block contains 2,012 transactions involving just over 1,000 bitcoin, as well as the header of the previous block. If a user changed one transaction amount by 0.0001 bitcoin, the resultant hash would be unrecognizable, and the network would reject the fraud.

Since a given set of data can only generate one hash, how do miners make sure they generate a hash below the target? They alter the input by adding an integer, called a nonce ("number used once"). Once a valid hash is found, it is broadcast to the network, and the block is added to the blockchain.

Mining is a competitive process, but it is more of a lottery than a race. On average, someone will generate acceptable proof of work every ten minutes, but who it will be is anyone's guess. Miners pool together to increase their chances of mining blocks, which generates transaction fees and, for a limited time, a reward of newly-created bitcoins.

Proof of work makes it extremely difficult to alter any aspect of the blockchain, since such an alteration would require re-mining all subsequent blocks. It also makes it difficult for a user or pool of users to monopolize the network's computing power, since the machinery and power required to complete the hash functions are expensive.

RELATED TERMS
  1. Target Hash

    A target hash is a number that a hashed block header must be ...
  2. Hash

    A hash is a function that converts an input of letters and numbers ...
  3. Difficulty (Cryptocurrencies)

    Difficulty is a parameter that bitcoin and other cryptocurrencies ...
  4. Merkle Root (Cryptocurrency)

    A Merkle root contains information about every single transaction ...
  5. Block Time (Cryptocurrency)

    Block time is the average time for a new block to be generated ...
  6. Mining Pool

    A mining pool is a joint group of cryptocurrency miners who combine ...
Related Articles
  1. Tech

    How Does Bitcoin Mining Work?

    Bitcoin mining, explained like you're five.
  2. Tech

    Bitcoin Cash Set To Undergo Hard Fork

    The cryptocurrency will undergo a hard fork to enable a stable hash rate amid extreme price volatility.
  3. Tech

    Blockchain Could Make You—Not Equifax—the Owner of Your Data

    All hype aside, blockchain technology is really good at one thing: taking out the middlemen. Leaky data brokers' days may be numbered.
  4. Tech

    What Is Bitcoin?

    We know, bitcoin isn't exactly straightforward. If miners, hashes, keys, blocks and wallets have you scratching your head, this infographic is for you.
  5. Tech

    Bitcoin vs. Bitcoin Cash: What's the Difference?

    We break down the difference between Bitcoin and Bitcoin Cash, and what it might mean for the future of cryptocurrencies
  6. Tech

    Bitcoin 2.0 Applications (AMZN, EBAY)

    The bitcoin blockchain enables the application of decentralized public ledgers for purposes other than digital currencies referred to as Bitcoin 2.0 or sometimes more generally "crypto 2.0.”
  7. Tech

    Bitcoin Is Dead? Not A Chance

    The price of the digital currency, Bitcoin, fell from around $450 to below $380 late last week following the departure of long-time developer Mike Hearn.
  8. Tech

    How the Bitcoin Hard Fork In November Might Affect Miners

    The bitcoin mining community is divided about the prospect of a hard fork this month.
  9. Tech

    China Intensifies Crackdown On Bitcoin Mining

    Bitcoin prices probably won't be affected much in the near term by the Chinese government's anti-crypto moves.
  10. Tech

    Bitcoin Unlimited Thwarted, Again!

    Bitcoin Unlimited is vying for supremacy in the Game of Bitcoins, but it's got some problems.
RELATED FAQS
  1. What's the difference between the general ledger and a general journal?

    Keeping records for most organizations require a double-entry bookkeeping system, which revolves around transactions in the ... Read Answer >>
  2. What main factors affect share prices in the metals and mining sector?

    Discover the primary factors that influence share prices of companies in the metals and mining sector and how companies can ... Read Answer >>
  3. What is double entry bookkeeping and how does it work in the general ledger?

    Learn about the double entry method of bookkeeping and how it works in the general ledger. Every accounting transaction has ... Read Answer >>
Hot Definitions
  1. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  2. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  3. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  4. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  5. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  6. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
Trading Center