Research Study

Understanding Proof-of-Work

A nontechnical introduction to bitcoin mining and its implications for investors

by Chris Kuiper and Matt Hogan

Investors are generally aware of Bitcoin and its related “mining” activity that uses electricity. However, many may still be unfamiliar with why Bitcoin uses electricity and may question if it is useful, necessary, or if it could be replaced with something else.

The purpose of this paper is to more fully explain bitcoin mining, or “proof-of-work,” and to show how this feature is linked to several properties of bitcoin. It is vital for any investor considering bitcoin as an investment to understand at a deeper level what bitcoin mining is, how it works, what it accomplishes, how it may differ from other systems, and what this means for their investment.

The scope of this paper will be confined to understanding proof-of-work and, therefore, will not delve into the environmental debate of bitcoin mining, such as how much energy it uses, from what sources, emissions, etc. Investors must first have foundational knowledge of proof-of-work and the problem it solves to effectively inform further analysis regarding energy use.

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