Proof of Work is a scheme used by many protocols and pioneered by Bitcoin that incentivises miners to be honest. The way the scheme works is:
- Miners compete to solve a computationally intensive mathematical puzzle first
- The winner gets to add the next block of transactions to the blockchain
- For adding the block, the winner is given a block reward
- The other miners validate the block added by the winner. If the block is rejected as invalid, then then the winning miner will not receive the block reward
Each miner has to invest in hardware and electricity if they want to compete to add the next block. The return on their investment comes from the block reward. However, miners are disinventivised from cheating because of the possibility that they do not receive the block reward.
Some of the criticisms of Proof of Work are:
- It is environmentally unfriendly due to the high energy usage by miners
- The advantage offered by special mining chips (called ASICS) leads to centralisation of mining due to the investment needed to buy these chips
- It takes a long time to process transactions, which in turn leads to high network fees
Because of these criticisms, some protocols choose to use Proof Of Stake instead