"Proof of Work" (POW) is the security consensus mechanism of the Bitcoin protocol. It is the foundation of everything and plays a crucial role in the game theory of Bitcoin.

To explain how it works, envision a universal lottery where everyone can participate. The goal is to find a specific number that enables the winner to sign a valid block, earning a reward in Bitcoin. This number is very simple to verify using the SHA-256 hash function, but difficult to find: participants (miners) will try billions upon billions of possibilities, such as 1, 52, 2648, 26874615, 15344854131318631, and so on, until they discover the right one.

If the chosen number is correct: Jackpot! Otherwise, the search continues. To optimize the number of attempts, they will use specific machines called ASICs, which have the sole role of calculating billions of possibilities per second (the total quantity of attempts is called "HashRate"). To operate these machines, large quantities of electricity must be consumed. Therefore, POW transforms energy into currency, connecting the real world and the digital world to create the first energy-based currency.

The machines operate continuously, and after an average of 10 minutes, a winner emerges: this participant has successfully found the correct hash that falls below the difficulty threshold. This single winner will then sign the new block of the timestamp server, adding it to the blockchain. They receive their rewards and return to try their luck at mining the next block. This process has been ongoing for more than ten years, with a winner confirming Bitcoin transactions every 10 minutes while also securing past transactions, thereby making the Bitcoin blockchain more robust and secure.

Every 2016 blocks (approximately every two weeks), the difficulty adjustment rebalances the global mining game based on the number of participants. This adjustment is necessary because the number of miners and their combined computing power can vary significantly over time. To maintain the target block time, the network recalibrates the difficulty level based on how quickly the last 2016 blocks were mined. If they were mined too quickly, the difficulty increases, making it harder to find the correct hash. On the contrary, if they were mined too slowly, the difficulty decreases, making it easier.

Over the years, miners have equipped themselves with increasingly efficient computer hardware to produce as many hashes as possible per second (HashRate) while consuming the least amount of energy in the most cost-effective way possible. The early miners, like Satoshi or Hal Finney, mined using just their CPU, then others started mining with their graphics cards. Nowadays, miners use ASICs (Application-Specific Integrated Circuit): machines solely designed to apply the SHA256 algorithm.

The hashrate of the Bitcoin network represents the number of attempts made per second to find the next block. Today the hashrate surpasses 500 TH/s, which is 500,000 billion attempts per second! The higher the global hashrate, the more difficult it is for a malicious actor to monopolize the resources needed to obtain the majority of the mining power and spend their funds more than once (double spending problem). It is therefore more economically viable to follow the rules of the Bitcoin protocol than to act against them.

The block header contains several elements such as the time, the difficulty target, the number of the last block, the version used, and the Merkle Root of the previous transactions.

The coinbase transaction is always the first transaction included in a block: it contains the miner's reward for performing proof-of-work. Then come the validated transactions. Miners will choose to insert the transactions which give them the most profit, namely small-sized transactions with maximum fees.

Initially, a miner is compensated when they find a valid block. More precisely, they are rewarded in two ways:

The amount of the subsidy is defined by the consensus rules and depends on the Epoch: block reward = block subsidy + transaction fees.

For the first blocks, the block subsidy was 50 bitcoins. Every 210,000 blocks (approximately every 4 years), this amount is halved. Today (in 2024), we are in the 5th Epoch, which means that the subsidy is 3.125 bitcoins. In short, this is the automatic mechanism that releases new bitcoins in the system. The subsidy decreases over time, until it meets the limit of issuance of 21 million bitcoins. There are already over 19.4 million bitcoins in circulation, which is over 92%.

The second method of compensation is defined by the amount chosen by users for transaction fees, which show the urgency of the user to have their transaction included in the next block. Since miners want to maximize their income, they will tend to prioritize transactions with high transaction fees.

To stabilize their business model, which relies on the rewards they receive for each valid block, miners often create groups through "mining pools", where they pool their computing resources.

In short, the innovation of Bitcoin is to propose a solution to the problem of double spending through the use of a blockchain based on Proof-of-Work with a floating difficulty. In the digital world, the concept of ownership differs from that of the physical world. In fact, in the digital world, everything can be copied and pasted, which creates the risk of using digital assets of value more than once, or double spending. Trusted intermediaries, such as banks, have been created to solve this technological problem and ensure that when an asset is transferred, it no longer belongs to the sender.

But how can this be done without a trusted intermediary? This problem is well described through the Byzantine Generals paradox, a problem of coordinating information in a system where various actors cannot be trusted. In the Byzantine Generals Problem, a group of generals must coordinate an attack on a city, but some may be traitors trying to disrupt the plan. The challenge is for the loyal generals to reach a consensus on whether to attack or retreat, despite receiving potentially misleading messages from the traitors.

Bitcoin is therefore a kind of solution to this issue, or at least to work around it. The "generals" of Bitcoin, or miners, produce blocks (of information) and Bitcoin nodes verify financial transactions using consensus rules to ensure the authenticity of the information. The asymmetry in the energy cost between information production and verification ensures the reliability of the information, without a trusted third party.

Miners are the builders of the Bitcoin network security. By spending energy to produce hashes, they build a wall that makes it extremely costly for a malicious agent to rewrite the transaction history, and this economic disincentive deters others from behaving dishonestly.

Even in the case of a 51% attack, where an agent would possess more than half of the hashrate, the network would remain secure because the attacker must spend as much energy as all the miners combined to attempt to modify the blockchain. This energy-intensive proof-of-work mechanism is what ensures the network's security.

The game theory applied to Bitcoin eliminates dishonest miners, who use ASIC machines to mine and receive a reward in case of success. Additionally, they often join mining pools to share their computing power and receive smaller but more regular rewards. While Bitcoin mining incurs high energy costs, it is crucial for the operation and security of the Bitcoin network. The proof-of-work mechanism and blockchain technology address the double-spending problem and ensure the integrity of information without relying on a trusted third party. Although producing information requires significant energy expenditure, verifying that information incurs a negligible cost. This asymmetry reinforces the network's security, making it more economically viable to adhere to consensus rules rather than attempt to break them.

If you wish to explore the specific topic of Bitcoin mining in greater depth, you may consult our MIN 101 course. You will find a detailed theoretical explanation of the principle of proof of work and how it operates, as well as all the concepts associated with it.

I also recommend discovering this more advanced practical course, in which we explain how to turn an ASIC into a DIY home heating system, in order to make use of the heat produced by mining and earn your first satoshis!