What is proof of work, and why is it integral to Bitcoin Mining?

Proof of work is a term that’s been regularly tossed around in the Bitcoin Mining sector. But what is it really, and why is it essential for cryptocurrencies?

The Proof of Work algorithm, or PoW for short, is one of the primary tenets underpinning the operations of Bitcoin—the original Bitcoin as envisioned by the Satoshi Nakamoto whitepaper. It’s the original consensus algorithm in a blockchain network, creating an economic measure that deters attacks to the network such as distributed denial-of-service attacks (DDoS).

PoW is a concept that exists prior to Bitcoin’s genesis. The idea of PoW was first explained in a 1992 journal article authored by Cynthia Dwork and Moni Naor as a way to deter spam, but the term “proof of work” didn’t come into play until 1999, when Markus Jakobsson and Ari Juels coined it in a document.

For Bitcoin, the PoW algorithm makes it so that the probability of mining a block depends of the work done by miners. In his seminal whitepaper, Satoshi Nakamoto stated that miners “vote with their CPU power.” This allows for a competitive race to solve a mathematical puzzle, and successful miners are rewarded with Bitcoin, leading to an ever growing robust system with a distributed trustless consensus—one that is increasingly more difficult, not to mention costly to attack.

Writer Sumanth Neppalli explains in a Medium post that Proof of Work “discourages collusion of actors” as it is “a global decentralized free market that cannot be influenced by any action other than investment into the network.”

The fallacy of wastefulness

These days, mining activities require sizeable investments, as equipment move from GPU to ASIC. In addition, many crypto opponents deemed the PoW concept as wasteful.

The ongoing fallacy is that Bitcoin Mining will pave the way for “environmental devastation” due to its energy use. But as Dan Held points out, POW is about the physics behind a movement, not about the
code. Since cryptocurrency is a commodity that is minted from energy, POW turns “electricity into digital gold.”

The so-called “economic density” of a crypto transaction is also constantly increasing. This means, according to Held, is that the energy unit secures more economic value as the blockchain evolves into a settlement network.

Bitcoin Mining operations can be located in areas where the least expensive energy can be sourced, and in the future, it can help with renewable energy sources that have variable output. Squire Mining, for its part, is constantly reviewing hosting opportunities in stable jurisdictions around the world as it maintains its growing fleet of mining operations.