Mining is the process by which new cryptocurrency coins are added to the money supply.

Miners provide processing power to the bitcoin network in exchange for the opportunity to be rewarded bitcoin. Proof of work is essentially how miners prove that they contributed the mining power to the network and is used verify and process transactions

All blockchains need a consensus protocol to check that transaction is legitimate, but not all blockchains use the same mining consensus.

Proof of work is one of the two most popular ways of proving consensus between the different peers in a blockchain network, with the other being proof of stake (POS). In this article we will take a look at what the proof of work actually is, its benefits and drawbacks, as well as how it compares to Proof of Stake.

What is it proof of work?

Proof of work is the original blockchain mining consensus protocols, having been invented in 2009 with the launch of Bitcoin.

The creator of Bitcoin, “Satoshi Nakamoto” needed a way for users to transact on the Bitcoin blockchain without the need for a 3rd party to verify the transactions.

In order for the transactions to be processed and recorded on the global ledger, computers on the blockchain contribute their processing power. The reward for being part of this network is the possibility of being issued a Bitcoin.

Generating bitcoin wasn’t the original purpose of mining. Instead, it was intended to be a by-product and reward for processing transactions and contributing to the blockchain network. But not all computers contribute equally and not all are rewarded equally.

Satoshi decided that ‘proof of work’ would be the ideal mining consensus to ensure that those who contributed processing power to the network had the opportunity to be rewarded with Bitcoin.

As transactions are made, they are recorded in a new block within the blockchain. A new block is created, or ‘mined’, every 10 minutes, with each block containing a record of all of the transactions that have occurent in the previous 10 minutes.

In order to ensure that the transactions are legitimate, they need to be confirmed by the network, and the way that computers prove that they contributed to this is by solving a mathmatical puzzle. Solving this puzzle is the ‘proof of work’ and computers compete with each other to see who can solve this puzzle first in order to be rewarded with bitcoin.

To solve the puzzle, the computers need to take all of the incoming transactions into groups, or blocks, and figure out the digital fingerprint, or hash, of the block of transactions.

For the powerful computers used in managing a blockchain, generating a digital fingerprint of the block would be a relatively simple task. If this was too simple then it would be too easy to be rewarded, so to make it more challenging, the problem-solving process includes a difficulty factor.

This difficulty is adjusted by the blockchain by setting a target hash.

The lower the target hash, the fewer solutions to the puzzle, in the form of a hash, submitted will be considered valid, resulting in it being more challenging for computers to solve the puzzle. The target hash is lowered by adding more 0’s to it. Here is an example of a hash on the Bitcoin blockchain e.g.

Why is difficulty increased?

Since they have been invented, computers have (on average) doubled in processing power every 18 months, while halving in cost. If the difficulty of the mathematical puzzle stayed constant over time, faster computers would find it increasingly easy to solve the problems, meaning that the time taken to verify the transactions on a block would reduce hugely.

Increasing the difficulty therefore ensures that it takes the same amount of time to mine each block as originally intended despite computers becoming more powerful.

In addition, increasing the difficulty also controls the ratio of supply and demand. As the demand increases, the amount of computers mining on the blockchain will rise too. More computers mining will result in the blocks being mined a lot quicker as well. This is what the network tries to prevent.

How Is Proof of Work Used?

Proof of work in a blockchain acts as a consensus for all of the computers in the network. It prevents malicious users exploiting the blockchain for personal financial gain while allowing users to without the need for a 3rd party to facilitate the transactions.

These exploits include spending their cryptocurrency balance twice, changing transactional data in the blockchain, or gaining control of the whole blockchain by controlling a majority of the peers.

Why Is Proof of Work Good?

Proof of work prevents malicious users from exploiting the blockchain by utilising aspects of advanced cryptography i.e. secret codes.

The main concept of cryptography used in the blockchain is hashes – essentially translating information into seemingly random letters and numbers. These hashes are recorded in the global ledger across the blockchain, which means that if one copy of the hash record is changed, it won’t match the other copies across the blockchain and will therefore be easy to identify. Hashes therefore ensure that the blockchain detects, and prevents, any changes in its data as soon as they happen.

The hash of the block is directly related to the information in the block, and changing the information within the block will result in a completely different hash. Thus making it possible to detect any tampering with the block’s information.

For example, someone wouldn’t be able to reverse a transaction that they made in the past by erasing the record of it, as the blockchain will detect the tampering by identifying that the hash is now different and ban the computer that tried to tamper with the information.

This keeps everyone on the blockchain honest and keeps the information stored on the blockchain safe.

The mining difficulty makes it impractical for someone to gain control of the blockchain.

In order to gain control, a person would need to own 51% of the computers on the blockchain. If they had this then they could falsify records by processing and validating incorrect transactions and stil be able to achieve ‘consensus’ as over half of the computers in the network would agree. This is known as a 51% attack.

For larger blockchains, this is not feasible financially since the cost of owning and maintaining the computers will far outweigh the financial rewards of gaining control of the blockchain. At the time of writing, Bitcoin is run by 47,000 computers. It would cost more to buy 23,501 computers and maintain them than the payout would be from gaining control of the blockchain.

The drawbacks of proof of work


Proof of work relies on the computers that maintain it to keep the blockchain and its data secure. This is a potential vulnerability for the blockchain. This is because the blockchain can only be regarded as secure if there are a lot of computers verifying the transactions on it. If the number of computers decreases for some reason, like a sudden loss of interest in the project, then the blockchain becomes more vulnerable.

It’s best to think of the computers as a team of security guards for the blockchain’s information. It will be easier to have access to the information as the security around it gets less and less. It also opens up the door to the 51% attack – controlling 51% of the computers on the blockchain is a lot more achievable when there are only a handful of computers protecting it – much more achievable when compared to the current number of computers running Bitcoin, for example.

51% blockchain attack

Monopoly of Mining Rewards

The mining of some blockchains is relatively difficult, and as difficulty increases, more computing resources are required to solve the proof of work puzzle.

Therefore, individual miners can not not take part in the mining in their personal capacity as their computers aren’t powerful enough to solve the complex puzzle. Instead, they need to join a mining pool to have a chance at solving the puzzle and earning some of the reward.

However, some large companies, or wealthy individuals, can afford large amounts of computing power to mine cryptocurrency without joining a pool. This gives the wealthy individual or company a better chance of winning the reward. Plus, they won’t have to share the reward like members of a pool would.

If this trend continues, it may lead to the blockchain deviating from its decentralised nature, as the mining rewards can almost be monopolised by anyone wealthy enough to do so.

Environmental Impact

As the proof of work puzzle becomes more difficult to solve, the processing power required to solve it also increases. And as more powerful computers are required, the electricity needed to power these computers also increases.

The energy requirements of bitcoin mining now has a sizeable environmental impact. A recent statistic at the time of writing shows that Bitcoin’s (the largest proof of work blockchain) energy consumption is greater than that of Switzerland. This also acts as a restriction for the technology to scale and prevents it from becoming the next global payment solution.

What are proof of work rewards?

The rewards in a proof of work blockchain are paid to the computers (miners) who were the first to solve the computational puzzle. These rewards are made up of two parts:

  • The first reward is the new coins that are introduced to the blockchain’s circulating coin supply.
  • The second reward is being awarded all of the transaction fees in the newly mined block.

However, some blockchains have a limited total supply. Once the last coin is introduced to the blockchain, the reward will only consist of all of the transaction fees mined in the new block.

Bitcoin as an example

Let’s use Bitcoin as an example. Bitcoin has a pre-determined, limited supply of coins that can be mined: 21 million coins.

At the time of writing in 2021, bitcoin has a circulating supply of 18,590,300 coins.

Right now, the reward for being the first to solve Bitcoin’s computational puzzle is 6.25 BTC as well as the transaction fees in the new block.

However, it is forecasted that the last Bitcoin coin will be mined somewhere in mid 2140. When the last coin is mined, no more new coins will be introduced to the circulating supply – the reward will then only be from the mined transaction fees.

However, there is another term that we need to discuss – reward halving. Let’s take a look at what it is.

Reward Halving

As you may recall, mining fees are made up of 2 parts: the new coins brought into circulation and the mined transaction fees.

Some proof of work blockchains slice the prior in half after a certain milestone has been reached in the blockchain. This milestone can either be a certain number of blocks being mined or a certain amount of time that has passed.

In Bitcoin’s case, this is every 210,000 blocks, which is approximately every 4 years:

  • When Bitcoin was first mined in 2009, mining one block would earn the miner 50 BTC.
  • In 2012, this was halved to 25 BTC.
  • In 2016, this was halved again to 12.5 BTC.
  • On May 11, 2020, the reward halved again to 6.25 BTC
  • The reward will halve to 3.125BTC in 2024

Proof of Work vs. Proof of Stake

Proof of stake is an alternative  consensus protocol that solves some of the major problems of proof of work.

One of the major drawback of proof of work is its detrimental effect on the environment. A solution to this is ‘proof of stake’ which is more eco-friendly.

Not only that, but proof of stake also addresses the reward monopoly problem of proof of work. This makes it a much fairer mining consensus whereby everyone has equal opportunity to earn some of the reward.