Considered to be one of the crowning achievements of Bitcoin creator Satoshi Nakamoto, the idea for PoW was published in 1993 by Cynthia Dwork and Moni Naor. It has gone on to the foundations for several block-based networks and the consensus mechanism of choice for the majority of cryptocurrencies currently in circulation.
In short, the purpose of this consensus mechanism and others like it, is to reach consensus. Consensus = agreement.
How does Poof-of-Work ... work?
PoW is relatively simple. To finish a page of the blockchain ledger, a block so to speak, nodes (users) must figure out complex mathematical equations before they can validate transactions. This process is called mining, and those who take part in it are known as miners.
These mathematical problems are hard to compute but easy to verify. Once miners solve them, they are rewarded with the corresponding digital currency, referred to as a block reward.
If the minors are mining on the Bitcoin blockchain, they're rewarded in Bitcoin, if they're mining on the Monero.
The transactions in the block are then validated and the block is added to the chain. Real computational work goes behind this, hence the term, Proof-of-Work. As time goes by the mathematical equations become harder and harder.
This increase in difficulty, known as block difficulty, is intentional. The idea is to ensure that each mined coin requires a substantial amount of electricity.
PoW is expensive. The Bitcoin network, according to a recent study published in Joule, claimed that the network currently uses about 24 TWh of energy per year - about as much as Ireland does.
As the Bitcoin network grows, it will require even greater computing power. The neatly designed Bitcoin Energy Consumption Index provides the latest facts and figures. And you can see the charts are only going up. The energy usage is doubling every six months.
It is estimated that by the end of 2018 it will consume 0.3% of the world's electricity for the simple purpose of verifying transactions, albeit in a decentralized manner. Since these rising energy costs are paid in fiat currency, it builds a downward pressure that results in most miners selling the coins as soon as they are mined.
While PoW is expensive for miners, it does make a structure that is relatively safe from attacks. That's because the only way for an entity to disrupt the system and take over the network is by controlling 51% of the hashing power. This is not a problem, but it is not a problem.
Ultimately, a Proof of Work system ensures that a blockchain is valid. For Bitcoin, it also means that the coins are not mined too quickly and miners have incentives to maintain the network. On the flipside, this is also an infinitely scalable protocol.
Another big drawback is the formation of mining pools (groups of miners who pool their resources together) who could potentially control the network and collectively shepard the network, adding a very real danger to a decentralized solution.
The pros-of-the-stake (PoS) system, such as Proof-of-Stake (PoS), is being developed, system.