The blockchain technology that powers Bitcoin and many other cryptocurrencies is essentially a database, but it’s far different from a typical, centralized ledger. It’s decentralized and powered by peer-operated nodes distributed around the world, with no supervising authority to call the shots.

So how do you secure a decentralized network and ensure that everyone agrees on the contents of the ledger? That's where Bitcoin's proof of work consensus algorithm comes in.

In combination with public key cryptography, the proof of work consensus algorithm secures the distributed ledger and protects the network from “double spend” attacks, all while adding new blocks of transactions to the chain and generating BTC rewards.

The proof-of-work mechanism requires Bitcoin miners compete to solve complex mathematical equations using computers—a very energy-intensive process. It’s difficult on purpose, but the resulting Bitcoin rewards can be incredibly valuable.

Proof-of-work is essential to Bitcoin’s continued operation, but its energy consumption has received considerable scrutiny, and some other cryptocurrencies have embraced a very different proof-of-stake model instead. Here’s how proof-of-work functions, why it’s necessary for Bitcoin, and its drawbacks.

What is a consensus mechanism?

Unlike a traditional database overseen by an administrator, a public blockchain is a peer-to-peer decentralized network that any participant can potentially contribute to. Consensus is essential for such a network to function, given the potentially thousands of node operators: They all must agree on the state of the network for it to work properly.

A consensus mechanism is the process by which the network reliably and automatically determines which participant’s submitted block—a record of recent transactions—will be added to the chain, thus minting and rewarding them with new cryptocurrency in the process.

What is proof-of-work, and how does it work?

Proof-of-work is the consensus mechanism designed for Bitcoin by its creator, Satoshi Nakamoto. A similar model has been employed by Ethereum, Litecoin, Dogecoin and other cryptocurrencies since then. In the proof-of-work model, miners run hashing software on their computers, which harnesses their hardware’s power to solve complex math equations.

Ultimately, the math is arbitrary: Miners are doing work for the sake of it, to spend precious computing resources in exchange for a potential reward. It's an intentionally difficult process to prevent potential attacks on the network, but that means that more powerful computers have an advantage. From the early days of the Bitcoin network, there's been an "arms race" among miners. Initially they used their computers' CPUs to mine Bitcoin, but then they moved on to high-end graphics cards and finally dedicated ASIC mining hardware.

Bitcoin users broadcast transactions to the blockchain, and miners collect them up in a block and compete in proof-of-work to be the first to solve the equation via a process called hashing. The miner or mining pool whose block is accepted earns Bitcoins as a reward. As of June 2022, the reward was set at 6.25 BTC; it was originally 50 BTC, and it halves every four years. This process repeats every 10 minutes or so, as new blocks are written and new Bitcoin is effectively minted and awarded.

Why is it important?

Proof-of-work is a critical component of the Bitcoin network. Without such an energy-intensive process, it would be easy for bad actors to attack the network and “double spend” Bitcoin. That’s called a 51% attack, in which a mining group commands a majority of the network’s total hash rate (computing power), thus allowing it to manipulate blocks and take advantage of the system.

However, because Bitcoin’s proof-of-work is so resource-intensive, it’s nearly impossible for any miner or group to command that much total power.

Which cryptocurrencies use proof-of-work?

Proof-of-work is the dominant consensus model among cryptocurrencies, with the two largest coins—Bitcoin and Ethereum—both using it, along with other coins like Litecoin, Dogecoin, Bitcoin Cash, and Monero. (Ethereum is planning to move to prove-of-stake in 2022.)

What are the disadvantages of proof-of-work?

The biggest disadvantage of Bitcoin’s proof-of-work model is the sheer amount of energy required for mining. Digiconomist suggests that the entire Bitcoin network has a carbon footprint comparable to the country of Morocco, and electric car maker Tesla cited the environmental impact of mining when it decided to stop accepting Bitcoin payments in May 2021.

Given the value of Bitcoin and the rewards at stake, it’s no surprise that this is a controversial topic. Bitcoin advocates often suggest that such estimates of its energy usage are misleading or overstated, or counter that banks and centralized payments services don’t receive the same level of scrutiny.

Some believe that Bitcoin mining incentivizes the use of renewable energy, or suggest that Bitcoin mining uses generated energy that otherwise would have been wasted. The debate isn’t so much focused on whether Bitcoin mining expends a huge amount of collective energy—it does, and that’s by design. It’s also critical to maintaining Bitcoin as the protocol currently operates. Rather, much of the debate focuses on the types of energy being used, and whether it’s worthwhile. Bitcoin miners and fans, unsurprisingly, believe that it is.

Also, much to the chagrin of gamers, mining for cryptocurrencies such as Ethereum has sparked immense demand for powerful PC graphics cards (or GPUs), causing widespread shortages and price increases. That's led manufacturers to weaken the mining capabilities of their graphics cards to make them less desirable to miners.

While the immense scale of Bitcoin’s network means a 51% attack is likely impossible, that’s not true for smaller proof-of-work blockchain networks—Ethereum Classic and Bitcoin Cash each were attacked in 2020.

Proof-of-stake?

Amid concerns around the energy consumption of proof-of-work networks, an alternative consensus mechanism has taken root in the blockchain industry: proof-of-stake. A proof-of-stake system relies on validators to hold a large amount of the native cryptocurrency within the network, and those users validate transactions and earn rewards.

Coins like Cardano, Algorand, Cosmos and Binance Coin all use some form of a proof-of-stake model. As mentioned earlier, Ethereum is currently transitioning to that approach with its Ethereum 2.0 upgrade; the new network is estimated to consume 99.95% less energy than the current one.

Proof-of-stake doesn’t require high-powered computers or mining rigs, so the overall network uses vastly less energy than a proof-of-work system. On the flipside, detractors claim that proof-of-stake models help the “rich get richer,” since validators must stake a huge amount of coins to participate. It also incentivizes users to not spend coins.