proof-of-work (PoW)
The term proof-of-work (PoW) refers to the consensus mechanism that governs the functioning of a certain number of blockchains , such as the Bitcoin blockchain, through which all “miners” collectively determine the one miner that has the qualification of adding a new block to an existing blockchain and subsequently receives new cryptocurrencies that are native to the blockchain as a reward. To gain the qualification of adding a new block and receiving rewards, all miners who are interested in doing so must solve a mathematical puzzle as quickly as possible, thereby allowing the quickest one to gain this qualification. The quickest miner discovering the solution to each mathematical puzzle will also broadcast the newly added block to the entire blockchain network, thereby making sure that no single entity could alter each blockchain without having the consensus of the entire blockchain network.
Solving such a mathematical puzzle, especially solving it quickly, requires significant computational work. Additionally, as the level of complexity of each mathematical puzzle may increase over time, the longer a blockchain becomes, the more computational power this process entails. Therefore, the proof-of-work (PoW) mechanism has received wide criticism in light of the high quantity of electricity consumption that this process could entail. See: Cambridge Centre for Alternative Finance’s estimation .
Nevertheless, the proof-of-work (PoW) consensus mechanism has been a critical part of a number of famous blockchains because it ensures a certain level of decentralization, which has been the key feature that these blockchains claim to possess. It ensures a certain level of decentralization or reduces the level of centralization, because the outcome of each competition that determines the qualification of adding each new block is not based on the selection of any single party.
The first widely known blockchain that adopts proof-of-work (PoW) consensus mechanism is the Bitcoin blockchain. See: A Peer-to-Peer Electronic Cash System . On the other hand, the Litecoin blockchain adopts an alternative proof-of-work (PoW) algorithm called Scrypt PoW.
Nevertheless, with the complexity of each mathematical puzzle and the growing number of miners interested in receiving new cryptocurrency, the electricity consumption for quickly resolving each mathematical puzzle continues to rise to the extent that ordinary users may no longer afford. See: Zamfir v. Casperlabs, LLC . On the contrary, a number of mining facilities, often consisting of substantial numbers of mining machines with high-spec computational power, have been playing key, if not dominating, roles in mining new cryptocurrencies. As this process becomes less affordable to ordinary users, criticisms that the proof-of-work (PoW) mechanism no longer ensures decentralization emerged. Instead, it paves the way for a new form of centralization.
In November 2024, lawmakers in Texas (where some of the largest Bitcoin mining facilities in the world reportedly exist) passed a rule that imposed registration requirements for virtual currency mining facilities located within the Electric Reliability Council of Texas (ERCOT) region. This registration requirement requires annual information disclosure about each “virtual currency mining facility’s location, owners, form of business, and demand for electricity.”
[Written in December of 2024 by Kai Wang with the Wex Definitions Team ]
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