What Is Proof of Work (PoW) in Crypto?

Decentralization was a key part of the original vision for cryptocurrencies. To accomplish that, there needed to be a way to confirm transactions without the involvement of financial institutions. The first solution to this challenge was called proof of work.

Proof of work (PoW) is a form of adding new blocks of transactions to a cryptocurrency's blockchain. The work, in this case, is generating a hash (a long string of characters) that matches the target hash for the current block. The crypto miner who does this wins the right to add that block to the blockchain and receive rewards

Cryptocurrency started with proof of work since it's the consensus mechanism used by the first cryptocurrency, Bitcoin (CRYPTO:BTC). It's well-known for its security but also for inefficiency and a heavy environmental impact.

By understanding proof of work, you'll have a better understanding of the coins that use it. This can also help you choose where to put your money when investing in crypto. Keep reading for a full explanation of proof of work.

How the proof-of-work model works

The proof-of-work model is a consensus mechanism used to confirm and record cryptocurrency transactions.

Every cryptocurrency has a blockchain, which is a public ledger made up of blocks of transactions. With proof-of-work cryptocurrencies, each block of transactions has a specific hash. For the block to be confirmed, a crypto miner must generate a target hash that's less than or equal to that of the block.

To accomplish this, miners use mining devices that quickly generate computations. The aim is to be the first miner with the target hash because that miner is the one who can update the blockchain and receive crypto rewards.

The reason proof of work in cryptocurrency works well is because finding the target hash is difficult but verifying it isn't. The process is difficult enough to prevent the manipulation of transaction records. At the same time, once a target hash is found, it's easy for other miners to check it.

Example of proof of work

Here's an example of how Bitcoin uses proof of work to maintain the integrity of its blockchain.

When Bitcoin transactions occur, they go through a security verification and are grouped into a block to be mined. Bitcoin's proof-of-work algorithm then generates a hash for the block. The algorithm Bitcoin uses is called SHA-256, and it always generates hashes with 64 characters.

Miners race to be the first to generate a target hash that's below the block hash. The winner gets to add the latest block of transactions to Bitcoin's blockchain. They also receive Bitcoin rewards in the form of newly minted coins and transaction fees. Bitcoin has a fixed maximum supply of 21 million coins, but, after that, miners will continue receiving transaction fees for their service.

The proof-of-work algorithm used by Bitcoin aims to add a new block every 10 minutes. To do that, it adjusts the difficulty of mining Bitcoin depending on how quickly miners are adding blocks. If mining is happening too quickly, the hash computations get harder. If it's going too slowly, they get easier.

Proof of work vs. proof of stake

Proof of work was the first cryptocurrency consensus mechanism. An alternative, proof of stake, came out in 2012 with the launch of Peercoin (CRYPTO:PPC). It chooses transaction validators based on how many coins they've staked, or locked up, to the network.

Because proof of stake doesn't require nearly as much computing power as proof of work, it's more scalable. It can process transactions more quickly for lower fees and with less energy usage, making proof-of-stake cryptocurrencies more environmentally friendly. It's also much easier to start staking crypto than mining since there's no expensive hardware required.

However, proof of work is more proven from a security perspective. One potential problem with proof of stake is that parties with large crypto holdings could have too much power, which is an issue that proof of work doesn't have.

Advantages and disadvantages of proof of work

Here are the biggest advantages and disadvantages of proof of work:

Pros Cons
High level of security. Inefficient with slow transaction speeds and expensive fees.
Provides a decentralized method of verifying transactions. High energy usage.
Allows miners to earn crypto rewards. Mining often requires expensive equipment.


Proof-of-work coins

Here are some of the notable cryptocurrencies that use proof of work:

  • Bitcoin is the first cryptocurrency since it launched in 2009. It introduced the concept of proof of work in cryptocurrency, which would later be adopted by many future coins.
  • Litecoin (CRYPTO:LTC) is one of the earliest altcoins, or alternatives to Bitcoin. Launched in 2011, it was based on Bitcoin's code and offers improved transaction speeds.
  • Dogecoin (CRYPTO:DOGE) is a cryptocurrency that launched in 2013 and is based on the Doge meme. Despite starting as a joke, it would go on to gain a loyal following.

Proof of work was the consensus mechanism of choice for early cryptocurrencies that needed a secure, decentralized way to process transactions. Although proof of stake has since emerged as a less energy-intensive alternative, proof of work is still used by many major coins.

What Is Proof of Stake (PoS) in Crypto?

Since cryptocurrencies are decentralized and not under the control of financial institutions, they need a way to verify transactions. One method many cryptos use is Proof of Stake (PoS).

Proof of stake is a type of consensus mechanism used to validate cryptocurrency transactions. With this system, owners of the cryptocurrency can stake their coins, which gives them the right to check new blocks of transactions and add them to the blockchain.

This method is an alternative to proof of work, the first consensus mechanism developed for cryptocurrencies. Since proof of stake is much more energy-efficient, it has gotten more popular as attention has turned to how crypto mining affects the planet.

Understanding proof of stake is important for those investing in cryptocurrency. Here's a guide to how it works, its pros and cons, and examples of cryptocurrencies that use it.

How does proof of stake work?

The proof-of-stake model allows owners of a cryptocurrency to stake coins and create their own validator nodes. Staking is when you pledge your coins to be used for verifying transactions. Your coins are locked up while you stake them, but you can unstake them if you want to trade them.

When a block of transactions is ready to be processed, the cryptocurrency's proof-of-stake protocol will choose a validator node to review the block. The validator checks if the transactions in the block are accurate. If so, they add the block to the blockchain and receive crypto rewards for their contribution. However, if a validator proposes adding a block with inaccurate information, they lose some of their staked holdings as a penalty.

As an example, let's look at how this works with Cardano (CRYPTO:ADA), a major cryptocurrency that uses proof of stake.

Anyone who owns Cardano can stake it and set up their own validator node. When Cardano needs to verify blocks of transactions, its Ouroboros protocol selects a validator. The validator checks the block, adds it, and receives more Cardano for their trouble.

Mining power in proof of stake

Mining power in proof of stake depends on the amount of coins a validator is staking. Participants who stake more coins are more likely to be chosen to add new blocks.

Each proof-of-stake protocol works differently in how it chooses validators. There's usually an element of randomization involved, and the selection process can also depend on other factors such as how long validators have been staking their coins.

Although anyone staking crypto could be chosen as a validator, the odds are very low if you're staking a comparatively small amount. If your coins make up 0.001% of the total amount that has been staked, then your likelihood of being chosen as a validator would be about 0.001%.

That's why most participants join staking pools. The staking pool's owner sets up the validator node, and a group of people pool their coins together for a better chance of winning new blocks. Rewards are split among the pool's participants. The pool owner may also take a small fee.

Proof of stake vs. proof of work

Proof of stake and proof of work are the two most common types of consensus mechanisms cryptocurrencies use. Proof of work was the method of choice for early cryptocurrencies, including Bitcoin (CRYPTO:BTC), while proof of stake originated in 2012 with Peercoin (CRYPTO:PPC) and has become a common choice for altcoins.

The biggest difference between proof of stake and proof of work is their energy usage. Proof of work requires miners to compete to solve complex mathematical problems. The first miner to solve the problem gets to add a block of transactions and earn rewards. This results in mining devices around the world computing the same problems and using substantial energy.

Since proof of stake doesn't require validators to all solve complex equations, it's a much more eco-friendly way to verify transactions.

Pros and cons of proof of stake in crypto

Here are the pros and cons of the proof-of-stake model:

Pros Cons
Energy-efficient. Not as proven in terms of security as proof of work.
Provides fast and inexpensive transaction processing. Validators with large holdings can have excessive influence on transaction verification.
Doesn't require special equipment to participate. Some proof-of-stake cryptocurrencies require locking up staked coins for a minimum amount of time.


Proof-of-stake coins list

Here are examples of major cryptocurrencies that use proof of stake:

  • Cardano is a research-driven blockchain platform that prioritizes security and sustainability.
  • Tezos (CRYPTO:XTZ) is a programmable blockchain designed with an on-chain upgrade mechanism for adaptability.
  • Algorand (CRYPTO:ALGO) uses a two-tier blockchain structure to offer processing speeds of 1,000 transactions per second.

Because of how it works, proof of stake benefits both the cryptocurrencies that use it and their investors. Cryptocurrencies that use proof of stake are able to process transactions quickly and at a low cost, which is key for scalability. Investors can stake their crypto to earn rewards, providing a form of passive income. And the fact that proof of stake is environmentally friendly means it will likely continue to grow more popular as a consensus mechanism.