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Today we explain how “Proof of Work” works.
First, remember that cryptocurrencies validate transactions by checking each transaction with multiple decentralized computers. And if enough of those all come to the same conclusion, they move on to the next transaction.
This is like asking a room filled with accountants to check your credit card statements. If they all have the same final balance, you trust the result.
But there is one problem - because things are decentralized, anyone can mine a blockchain, or become an accountant. Say I send a bunch of friends into your room and tell them all to cheat on the numbers, then you wouldn’t know which result to trust.
Proof of Work reduces the incentive to do that. Here, the accountants all have to solve the same math puzzle and the quickest of them gets to work on my credit card statements and collect a reward for doing so. But if someone cheated, the results wouldn’t add up, they would have wasted a lot of time on the puzzle, and everybody has to start over without getting a reward. What was a simple cheat before, now becomes so time consuming that I can’t convince my friends to help.
And that’s how proof of work also works in cryptocurrencies, only that the accountants are computers, the puzzle is an algorithm, and the statements are transactions.
And next time, we’ll talk about “Proof of Stake” in more detail, which is the alternative to “proof of work”.
Disclaimer: This podcast references our opinion and is for information purposes only. It is not intended to be investment advice. Do your own research and seek a duly licensed professional for investment advice.
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