Proof of Work: Just Like with Pudding, the Proof is in the Work

Back at the turn of this century, the mention of "proof of work" would conjure up memories of time cards, "clocking in" and "clocking out", and long lines to begin and end each work day. Ah, for the uninitiated, time cards were literally a physical rectangular paper card that employees would insert into a machine at the beginning and end of each work day in order to record when they arrived, when they left for the day and when they began and ended their lunch breaks; and, yes, some companies used this system to keep track of how long employees took breaks. In some of the more primitive versions, the machine would actually punch a hole in the cards that kept track of working hours, and at the end of each week, the card would be fed into another machine for tabulation. Even though I had to use a time card for my first W2 job at the McDonald's at the North Shore Mall in Peabody, Massachusetts, and grew up in a professional world where this was commonplace, this version of "proof of work" certainly sounds draconian by today's standards. Eventually, time cards would give way to electronic key cards and good old-fashioned logging in and logging out of computers that kept track of work hours. Of course, when all that failed, there were always plenty of micromanaging supervisors or nosey coworkers at hand to help document your proof of work! Some things may never change.

The Proof-of-Work Ethic

In the world of cryptocurrencies, the notion of proof of work speaks to one of the fundamental pillars of many blockchains, most notably, Bitcoin. Proof-of-work blockchain networks rely on a process called computer mining to maintain the network. Essentially, miners provide both the computer hardware and the electrical power that is used to solve the complex cryptographic puzzles that are required to confirm all the transactions on a given network. The miners are in turn rewarded for their efforts with the respective crypto tokens that are generated by the underlying network. This is exactly how the blockchain ecosystem operates and functions with bitcoin and ethereum. As an aside, there has been great scrutiny and criticism of the proof-of-work blockchain model and its long-term sustainability due to the vast amounts of electricity it consumes, but that's for another edition of Rational Exuberance.

Finer Miners?

Now, a little more on those miners. Simply put, the miners are an indispensable component of every proof-of-work blockchain—they are responsible for the validation and recording of all new transactions on any given blockchain ledger. The miners validate transactions by solving a never-ending stream of complex math problems which in turn generates the minting of new tokens and has the added effect of strengthening the blockchain network's overall trustworthiness and security. One of the growing trends that has emerged over the past several years has been the formation of "mining pools", which essentially borrowed from the centuries-old cooperative business model (think Land-O-Lakes, ACE Hardware, and Navy Federal Credit Union) that allows sharing of expenses and pooling of resources to drive greater margins and purchasing power.

Dead Proof Walking?

There are many in the digital-asset and crypto industry who believe that the proof-of-work model, with its inherent inefficiencies and voracious appetite for electricity, has become outdated and is essentially headed for a similar fate as the dinosaurs. They point to a new model, the proof-of-stake consensus model, as the future. While most agree that such an evolution will ultimately take place, there is also an acknowledgment that there will still be a reliance on proof of work and the corresponding mining industry for legacy blockchains such as Bitcoin—a reliance that is more than sufficient to ensure the survival of proof of work into the foreseeable future.

As always, whether or not you are crossing the digital divide with Rubicon Crypto…please, remember to do so with common sense and with Rational Exuberance.