Proof of work (PoW) describes a consensus mechanism that requires a significant amount of computing effort from a network of devices. The concept was adapted digital tokens by Hal Finney in 2004 through the idea of "reusable proof of work" using the 160-bit secure hash algorithm 1 (SHA-1).
Following its introduction in 2009, Bitcoin became the first widely adopted application of Finney's PoW idea (Finney was also the recipient of the first bitcoin transaction). Proof of work forms the basis of many other cryptocurrencies, allowing for secure consensus.
Blockchains are distributed ledgers that record all bitcoin transactions, similarly to how you would enter transactions in a spreadsheet. Each block is similar to a cell. Information such as transaction amounts, wallet addresses, time, and date are recorded and encrypted into a block header—a hexadecimal number created through the blockchain's hashing function.
The hash from each block is used in the block that follows it when its hash is created. This creates a ledger of chained blocks that cannot be altered because the information from every block is included in the newest block's hash.
The two most popular consensus mechanisms are proof of work and proof of stake. Bitcoin's top competitor Ethereum used proof of work on its blockchain until September 2022, when the highly-anticipated transition to proof of stake was made. Here are some of the key differences between the two.
Validation is done by a network of miners
Bitcoin paid as a reward and for transaction fees
Competitive nature uses lots of energy and computational power
Validation is done by participants who offer ether as collateral
Ether is paid for transaction fees only
Less computational power and energy used
