Proof-of-work is the algorithm that secures many cryptocurrencies, including Bitcoin and Ethereum. Most digital currencies have a central entity or leader keeping track of every user and how much money they have. But there’s no such leader in charge of cryptocurrencies like Bitcoin. Proof-of-work is needed to make the online currency work without a company or government running the show.
More specifically proof-of-work solves the “double-spending problem,” which is trickier to solve without a leader in charge. If users can double-spend their coins, this inflates the overall supply, debasing everyone else’s coins and making the currency unpredictable and worthless.
Double-spending is an issue for online transactions because digital actions are very easy to replicate, which is what makes it trivial to copy and paste a file or send an email to more than one person.
Proof-of-work makes doubling digital money very, very hard. It’s much what it sounds like: “proof” that someone has done a significant amount of computations.
How proof-of-work works
Bitcoin is a blockchain, which is a shared ledger that contains a history of every Bitcoin transaction that ever took place. This blockchain, as the name suggests, is composed of blocks. Each block has the most recent transactions stored in it.