RSI indicator: why is it so useful?

What is Proof of Work (PoW)?

Proof-of-Work (PoW) is the first and most widespread mechanism for eliminating the threat of double-spending. Most popular digital assets (Bitcoin, Ethereum, Dogecoin, and others) use PoW as a consensus algorithm to protect the ledger.

Cryptocurrencies are undoubtedly complex and specific. However, if you untangle this digital thread gradually and carefully, the situation becomes less daunting. Starting with simple concepts like blockchain, cryptocurrency wallet, and virtual coin exchange, we have approached the more complex concept of the Proof-of-Work algorithm.

Definition of PoW

How Does It Work?

Having understood the definition of PoW, one might logically ask: "What is double-spending, and why avoid it?" Double-spending is the use of the same digital funds more than once. It’s hard to imagine a situation in everyday life where you can use the same fiat money twice, right? We can’t pay with the same banknote for groceries at the supermarket, hand it over to the cashier, and then go to the bakery across the street and pay with it again for a croissant.

However, in the world of cryptocurrency, this is entirely possible, as digital money is just data that can be copied and sent to an unlimited number of people. To avoid such situations, the Proof-of-Work mechanism was developed.

Thanks to it, cryptocurrency transactions become valid not at the moment they are made, but only after being verified and added to the blockchain (a ledger listing all actions performed by its users).

⁃ Less complicated to calculate compared to other indicators;
⁃ Autonomy (old data does not influence it);
⁃ Allows adding several different signals;
⁃ Can be used to identify the overall trend.

The task of PoW is to prevent network users from spending funds they cannot spend. For this, the consensus algorithm uses a combination of game theory and cryptography.