A Proof-of-Work is simply a key to solve a puzzle. When this key is generated and submitted the price is rewarded.
Lets’s understand Proof-of-Work (POW) in terms of Bitcoin Mining
We all know that bitcoin mining is based on proof-of-work algorithm. According to this algorithm, miners have to solve a mathematical encrypted puzzle in order to submit their block of verified transactions to blockchain and in return earn bitcoin in rewards. Solving of these mathematical problems requires a lot of trial attempts.
For example, suppose you have to open a lock which has a three digit passcode. Entering only a single particular combination of digits will only unlock the lock, which means there can be 729 combinations to unlock a three digit passcode. Now imagine if you are asked to unlock the lock by guessing the passcode. How much time and efforts will it take too guess one single combination out of 729 combinations.
Similarly, while solving the mathematical puzzle in proof-of-work algorithm, miners have to make random guesses to get the correct combination. Guessing on the combination requires a lot of time and in order to keep nodes ( ASICS chip/computers placed in mining network) running to guess the combination, uninterrupted supply of power and internet is required. Which means a lot of operational cost is involved .Also running machines for so long produces excessive heat and therefore additional cooling machines are also required in order to prevent fire and breakdown of the mining network.
First miner to guess the combination correctly will be able to submit his block of verified transaction to the Blockchain and in return received bitcoin rewards. So this combination or key is known as Proof-of-Work which has to be given to Blockchain network.
Getting Bitcoin in rewards is the only motive of miners to enter into mining pool. More and more number of miners are entering into the bitcoin mining network and hence competition increases. Once the competition increases, the blockchain software automatically increases the difficulty level of the encrypted mathematical puzzle. Hence, more the number of miners, difficult will be the level of solving puzzle which will in turn increase the accuracy of verified transactions and security of the blockchain network.
But what happens in future when the bitcoin mining rewards will be exhausted or all the 21 million bitcoins will be matured. Here comes another algorithm called Proof-of-Stake in the picture. Click here to read about Proof-of-Stake.
Rohit Kukreja is a Commerce graduate with Financial Markets expertise involving Stocks, Forex, Futures & Options Market and now Bitcoins & Cryptocurrency Markets. Blockchain Enthusiast but not a techie, Rohit is an active member of various Blockchain & Crypto communities all over India.