What is Proof of Work?

& why Bitcoin is different than other crypto

💡 Daily Reminder: Stay humble, stack sats

Bitcoiners,

One major characteristic that separates Bitcoin from the rest of cryptocurrencies (besides a few outliers) is the underlying consensus mechanism - Proof of Work.

Huh?

I know, it was a little challenging for me to understand too when I was new to Bitcoin.

Here is a brief explanation of the difference between Proof of Work vs Proof of Stake for beginners so that you can understand what makes Bitcoin different and why cryptocurrencies are really just the current banking system marketed as an alternative monetary system.

Cryptocurrency vs The Banking System

The best way to start to understand the point of PoW is to analogize it to the current digital dollar system we use today.

The banking system today verifies the dollars in your bank account are not used multiple times to pay for services or goods, which makes sense like how you cannot spend a quarter on a gumball and then take that same quarter and spend it on another gumball somewhere else, which is considered double-spent.

Photo by Pete Alexopoulos on Unsplash

The point of bitcoin (PoW) and other cryptocurrencies (PoS) is to remove humans and the banking system from verifying these transactions.

The Difference

When it comes to cryptocurrencies, one of two systems is used to verify transactions on the blockchain - PoW or PoS.

In layman's terms, Proof of Work (PoW) is the way bitcoin transactions are verified to confirm bitcoin is not double-spent like the quarter and gumball example. PoW achieves this through an energy-intensive process in the form of expending electrical energy via a computer to guess the answer to an algorithm. Whichever computer or bitcoin miner in this context guesses the correct answer to the algorithm, gets to add the next set of transactions to the bitcoin blockchain, and is rewarded bitcoin for their efforts.

Similarly, Proof of Stake (PoS) aims to verify transactions on other cryptocurrency networks that are not double-spent, just in a different way. PoS achieves this through a much less energy-intensive process in the form of staking or locking crypto in order to receive a reward. PoS requires network participants to stake some of their own cryptocurrency in order to decide which set of transactions are added to the inherent blockchain and get rewarded in crypto for their efforts.

Bitcoin > Dollars > Crypto

Bitcoin uses PoW combined with a few other innovations to be superior to both US dollars and other cryptocurrencies.

PoS is often promoted as the "sustainable" or "green" way to verify transactions because it uses much less energy than PoW, which is factually true, although it comes with its downsides such as a few centralized parties or stakers deciding which transactions are valid. If this sounds somewhat like the traditional banking system you are correct, it essentially mirrors the system we have today with the federal reserve and banks being the centralized parties. The downfalls of a PoS system including centralization and censorship are shown in Ethereum after it switched from PoW to PoS.

I’d rather use dollars backed by the US military than a PoS crypto token with zero to little network effects and censorship.

Happy Friday,

-Pod

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Eric Podwojski

Founder, Bitcoin EDU

www.BitcoinEDU.com

Twitter: @epodrulz

Disclaimer: This should go without saying: This is not financial advice. This is not investment advice. I write this newsletter for education and entertainment. Act accordingly.

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