What Is A Proof of Work And Why It Matters In Business

A Proof of Work is a form of consensus algorithm used to achieve agreement across a distributed network. In a Proof of Work, miners compete to complete transactions on the network, by commuting hard mathematical problems (i.e. hashes functions) and as a result, they get rewarded in coins.

Proof of Work in a nutshell

As Ethereum points out“in proof of work (PoW) based public blockchains (e.g. Bitcoin and the current implementation of Ethereum), the algorithm rewards participants who solve cryptographic puzzles in order to validate transactions and create new blocks (i.e. mining).”

Proof of Work explained in the original Bitcoin’s White Paper:

The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work.

As the White Paper explains, the several steps to run the network are:

1)  New transactions are broadcast to all nodes.

2)  Each node collects new transactions into a block.

3)  Each node works on finding a difficult proof-of-work for its block.

4)  When a node finds a proof-of-work, it broadcasts the block to all nodes.

5)  Nodes accept the block only if all transactions in it are valid and not already spent.

6)  Nodes express their acceptance of the block by working on creating the next block in thechain, using the hash of the accepted block as the previous hash.

The longest chain wins. When new proof-of-work are found, and a branch becomes longer, all the other nodes converge into the lowest blocks.

Origin story of Bitcoin

January 10th, 2009, a guy named Satoshi Nakamoto (it was only a pseudonym) sent an email to Hal Finney, a man from Santa Barbara:

“Normally I would keep the symbols in, but they increased the size of the EXE from 6.5MB to 50MB so I just couldn’t justify not stripping them. I guess I made the wrong decision, at least for this early version. 

I’m kind of surprised there was a crash, I’ve tested heavily and haven’t had an outright exception for a while. Come to think of it; there isn’t even an exception print at the end of debug.log. I’ve been testing on XP SP2, maybe SP3 is something.

I’ve attached bitcoin.exe with symbols. (gcc symbols for gdb, if you’re using MSVC I can send you an MSVC build with symbols)

Thanks for your help!”


The subject of the email was Crash in bitcoin 0.1.0. That man, Satoshi Nakamoto was explaining to Hal Finney how to use a Bitcoin.

Therefore, computers mining coins, solve harder and harder cryptographic puzzles, which work as a proof, thus making them rewarded with coins.

Proof of Work types

There are several types of Proof of Work. From hash functions to puzzles (cryptograms), sequences, hard inversions and many others. The key aspect here is in order for blocks to be validated computers mining to confirm transitions and produce new blocks. As those miners competing with each others, add blocks to the chain, as result they earn rewards (coins).

Distributed consensus

The whole point of Proof of Work, just like in the Proof of Stake is about enabling consensus in a distributed network.

Where Proof of Stake validates the network’s blocks based on proved stake of the validators.

In a Proof of Work, miners, pool up to generate coins for the network by solving harder and harder mathematical problems, and as a reward they get coins.

Advantages of Proof of Work

The original consensus algorithm in a Blockchain network was designed on proof-of-work. Thus, this, overall proved a solid consensus algorithm.

However, it has some drawbacks.


Some of the drawbacks of proof of work are:

  • Mining monopolies” Indeed, as the proof-of-work based Blockchain protocol grows, the computing power needed to complete new blocks might require higher efficiency. Therefore, miners tend to pool up and the ones becoming bigger will also become the ones able to mine more blocks, and therefore get more rewards. Those rewards if invested further in mining equipment it makes them further mine larger and larger portions of the network, thus creating a sort of pool monopoly.
  • Reduced decentralization: Decentralization is the main reason for the Blockchain existence. However, as the proof-of-work-based Blockchain protocol grows, it also becomes more concentrated, and therefore centralized.
  • Security: Large mining pools could, at least in theory, launch a 51% attack to take over or cause chaos on the network.

Key takeaways

Proof of Work is among the consensus algorithms used on Blockchain protocols. It is perhaps the consensus algorithm used on the first cryptocurrency, the Bitcoin.

The Bitcoin still works with a Proof of Work consensus algorithm, where Ethereum, for instance, is transitioning toward Proof of Stake.

Cryptocurrencies are serving as incredible lab for those various consensus algorithms and all the other systems built on top of them to be tested, validated and determined whether they can work at larger and larger scale.

Learn More From The Book Blockchain Business Models


Read Next: EthereumBlockchain Business Models FrameworkDecentralized FinanceBlockchain EconomicsBitcoin.

Connected Business Concepts

According to Joel Monegro, a former analyst at USV (a venture capital firm) the blockchain implies value creation in its protocols. Where the web has allowed the value to be captured at the applications layer (take Facebook, Twitter, Google, and many others). In a Blockchain Economy, this value might be captured by the protocols at the base of the blockchain (for instance Bitcoin and Ethereum). However, according to blockchain investor Paivinen due to ease of forking, incentives to compete and improved interoperability and interchangeability also in a blockchain-based economy, protocols might get thinner. Although the marginal value of scale might be lower compared to a web-based economy, where massive scale created an economic advantage. The success of the Blockchain will depend on its commercial viability!
A Proof of Stake (PoS) is a form of consensus algorithm used to achieve agreement across a distributed network. As such it is, together with Proof of Work, among the key consensus algorithms for Blockchain protocols (like the Ethereum’s Casper protocol). Proof of Stake has the advantage of security, reduced risk of centralization, and energy efficiency.
A Proof of Work is a form of consensus algorithm used to achieve agreement across a distributed network. In a Proof of Work, miners compete to complete transactions on the network, by commuting hard mathematical problems (i.e. hashes functions) and as a result they get rewarded in coins.
A Blockchain Business Model according to the FourWeekMBA framework is made of four main components: Value Model (Core Philosophy, Core Values and Value Propositions for the key stakeholders), Blockchain Model (Protocol Rules, Network Shape and Applications Layer/Ecosystem), Distribution Model (the key channels amplifying the protocol and its communities), and the Economic Model (the dynamics/incentives through which protocol players make money). Those elements coming together can serve as the basis to build and analyze a solid Blockchain Business Model.
Ethereum was launched in 2015 with its cryptocurrency, Ether, as an open-source, blockchain-based, decentralized platform software. Smart contracts are enabled, and Distributed Applications (dApps) get built without downtime or third-party disturbance. It also helps developers build and publish applications as it is also a programming language running on a blockchain.
The Graph is an ERC20 Utility Token (built on top of Ethereum) to enable consumers to freely query the blockchain through a fully decentralized database kept by indexers, incentivized by the payment of tokens (called GRT). The network is also ministered by curators and delegators that help maintain a high-quality index.
BAT or Basic Attention Token is a utility token aiming to provide privacy-based web tools for advertisers and users to monetize attention on the web in a decentralized way via Blockchain-based technologies. Therefore, the BAT ecosystem moves around a browser (Brave), a privacy-based search engine (Brave Search), and a utility token (BAT). Users can opt-in to advertising, thus making money based on their attention to ads as they browse the web.
In 2012, co-founders Christian Larsen and Jed McCaleb created Ripple, a technology acting as both a pre-mined cryptocurrency called XRP and a digital payment platform enabling monetary transactions. Where Ripple is the tech company, XRP is the decentralized ledger.
In 2014, Jed McCaleb – which also played a key role in the development of Ripple – created a cryptocurrency to provide fast, reliable, and affordable money transactions. The same cryptocurrency has considerably grown seven years later. It is now one of the most stellar cryptocurrencies to provide a real-time platform that links banks, payment systems, and people. Meet, Stellar!
In early 2019, a joint project between TRON and BitTorrent Foundation called BitTorrent Token came to fruition. BitTorrent Token launched to tokenize in-demand file-sharing protocol and enhance content delivery and bandwidth accessibility with blockchain technology.
Chainlink is considered the most established decentralized oracle network. As an ecosystem housing several decentralized oracle networks running simultaneously. As a decentralized oracle service built on Ethereum, Chainlink has the power to support the development of blockchain solutions for both traditional businesses and enterprises.
Uniswap is a renowned decentralized crypto exchange created in 2018 and based on the Ethereum blockchain, to provide liquidity to the system. As a cryptocurrency exchange technology that operates on a decentralized basis. The Uniswap protocol inherited its namesake from the business that created it — Uniswap. Through smart contracts, the Uniswap protocol automates transactions between cryptocurrency tokens on the Ethereum blockchain.
In essence, Polkadot is a cryptocurrency project created as an effort to transform and power a decentralized internet, Web 3.0, in the future. Polkadot is a decentralized platform, which makes it interoperable with other blockchains.
Designed and created as an alternative to Ethereum, Cardano claims to be the first decentralized blockchain protocol to use a scientific approach and undergo a peer evaluation.
Solana is a blockchain network with a focus on high performance and rapid transactions. To boost speed, it employs a one-of-a-kind approach to transaction sequencing. Users can use SOL, the network’s native cryptocurrency, to cover transaction costs and engage with smart contracts.

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