proof-of-work (PoW)
Proof-of-work (PoW) is a consensus mechanism used to regulate the addition of new blocks to certain blockchains, such as Bitcoin. In a PoW system, miners compete to solve a complex mathematical puzzle. The first miner to find a valid solution earns the right to append a new block to the blockchain and receives a reward in the form of newly generated cryptocurrency native to that blockchain. This process functions as a decentralized competition. All participating miners attempt to solve the same puzzle, and the first to do so broadcasts the validated block to the rest of the network. Public dissemination of the solution ensures that all nodes can verify the new block and prevents any single entity from altering the blockchain without broad network consensus.
Solving PoW puzzles requires significant computational effort, particularly as puzzle difficulty increases over time. As a blockchain grows, the amount of computing power required to maintain it also increases. The Cambridge Centre for Alternative Finance has reported on the substantial electricity consumption associated with PoW mining, which has led to environmental concerns and criticism of the mechanism. Despite these criticisms, PoW has been a foundational component of major blockchains. It promotes decentralization by ensuring that no central authority selects which miner may add a block. The outcome is determined by computational effort rather than by the influence of any single party.
Bitcoin was the first widely known blockchain to implement PoW, as described in Bitcoin: A Peer-to-Peer Electronic Cash System by Satoshi Nakamoto. Other blockchains, such as Litecoin, also use PoW but may adopt different algorithms. Litecoin uses a Scrypt-based PoW system instead of Bitcoin’s SHA-256. As puzzle difficulty has increased and participation has expanded, the required computational resources and associated electricity costs have made mining less accessible to ordinary users. In many cases, large-scale mining operations with specialized hardware have come to dominate the process. This trend has led to concerns that PoW may inadvertently foster centralization by concentrating mining power in the hands of a few entities.
In November 2023, Texas lawmakers enacted rules affecting virtual currency mining operations located in the Electric Reliability Council of Texas (ERCOT) region. The rules require these facilities to register and disclose information annually, including location, ownership, business structure, and electricity demand. Texas has hosted several of the world’s largest Bitcoin mining facilities.
[Last reviewed in September of 2025 by the Wex Definitions Team]
Keywords
Wex