What is Proof-of-Work?
Proof-of-work, currently, is the protocol that guarantees the security of most cryptocurrencies, including Bitcoin, Ethereum, Litecoin, and Monero. First proposed by Satoshi Nakamoto in 2009, PoW was the first mechanism ever conceived that adequately solved the so-called "double-spending problem," making possible electronic money and other digital assets as a concept.
For digital money to work as a concept, there needs to be a way to ensure that, following a payment, the person who paid no longer remains in ownership of the money used. Double-spending is the risk that a coin or token could be transferred twice. When you transfer, say, a music file to your friend, it's no big deal if a copy of that file remains on your computer, as the multiplicity of the data does not change its value. However, in a situation where Ann transfers $1 to Bob, after the transaction Ann should have one less dollar, while Bob should have one more.
The innovation proposed by Nakamoto (and implemented into Bitcoin and other PoW blockchains) was to require members of the decentralized payment network, called miners, to verify that transactions are not 'doubly-spent,' by adding eponymous 'blocks' to an irreversible list, or 'chain'. In order to have the right to do this — and to receive mining rewards as a result — these miners must provide 'proof' in the form of work. This means that they must use quite a significant amount of computing power to solve an extremely complex mathematical solution.
It is argued by proponents of PoW blockchains that the protocol is a superior way of preventing attacks on the network. The incredible amount of capital required for PoW mining, they say, increases the honesty of miners. Geographic distribution of miners, furthermore, should in theory prevent the creation of cohorts of malicious network participants.
Critics point out some other issues: For one, large PoW blockchains like Bitcoin consume an enormous amount of energy, leading to environmental concerns. In fact, the energy use of the Bitcoin network surpasses that of a number of fairly major economies, like Norway
. Second, there may be the risk of gradual market centralization for PoW networks through the dominance of large miners with access to a very large amount of computing power. Finally, there also exists the worry of geographic concentration of miners in less-than-democratic countries, like China, Russia, and Kazakhstan, where mining firms have decided to set up data centers owing to lower electricity costs and easier cooling.
Developers of Proof-of-Stake blockchains claim to offer an effective alternative that considers both the energy-use and mining centralization problems.