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No, it’s not a report you have to show your boss—proof-of-work is a mechanism used to mine cryptocurrencies, including bitcoin.
To understand proof-of-work is to understand how cryptocurrencies are born. Bitcoin and other cryptocurrencies like dogecoin and litecoin are digital assets created or “mined” on blockchains—digital ledgers distributed across a network of computers. Blockchains are decentralized, meaning that they’re not governed by a central authority, such as the Bank of Canada or the Canadian government.
To function, blockchains use an automated decision-making process, called a “consensus mechanism,” to decide on the list of transactions to be included in the next “block” of data. Proof-of-work (PoW) is one of two popular consensus mechanisms (the other being proof-of-stake, or PoS).
PoW is a process that requires several computers in a network to compete against each other to solve a randomly generated mathematical problem. This is crypto mining. The complexity and randomized nature of the problem ensure that the mechanism is not easily gamed. The world’s most popular cryptocurrency, bitcoin, uses this method to mine (create) coins and validate transactions on its blockchain. The “miner” that solves the problem first adds a new block to the chain and is rewarded with additional coins. The computer that solves the math problem first is said to have done the “work” required for the next block to be added to the blockchain.
Proof-of-work is one of the pillars of decentralized finance (DeFi). However, it requires expensive specialized hardware and has come under attack for the large amounts of energy it consumes.
Example: “Steve is concerned about the impact that mining crypto has on the environment, so he doesn’t invest in bitcoin, dogecoin, litecoin or other cryptos that use the proof-of-work consensus mechanism.”
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