Ethereum Proof of Work

Consensus (Key Concept): the fault-tolerant mechanism used

to agree on account balances and the order of transactions.

The current consensus mechanism used by the Ethereum

blockchain is proof of work.

Read about the key concepts and pros/cons👇

1. Intro

Ethereum uses a consensus protocol called Proof-of-work

(PoW).

This allows the nodes of the Ethereum network to:

- agree on the state of the recorded info in the blockchain
- prevents some economic attacks.

In the future, it will be replaced with Proof-of-Stack .

2. What is PoW

PoW allows the network to come to a consensus, or agree on

account balances and the order of transactions.

This:
- prevents users from double-spending
- makes the chain hard to manipulate.

3. PoW & mining

PoW: an algorithm that sets difficulty/rules for the work miners

do.

Mining: the act of adding valid blocks to the chain.

The chain's length helps to:
- follow the correct chain.
- understand the state.

More work done > the chain is longer > more state's certain

4. PoW & Work

Miners make a race of trial & error to find the block's nonce.

A dataset is repeatedly put. You can get it by downloading &

running the full chain.

The hash target is easy to verify, hard to compute.

If a transaction is different, the hash is different => FRAUD.

5. PoW & Security

Goal: extend the chain and have a single source of truth.

Miners are incentivized to work on the main chain

Users always choose the longest chain.

It's super hard to:

- create new blocks that erase transactions
- create fake blocks
- maintain another chain

6. The 51% Rule

A malicious miner would need to solve the block nonce faster

than everyone else.

To create malicious valid blocks, you need 51%+ network

mining power to beat everyone else.
This would need a lot of computing power!
The energy spent could be higher than the gain!

6. PoW economics

PoW is responsible for:

- issuing new currency in the system
- incentivizing miners.

Miners who create a block get rewarded with 2 ETH and all the
block's transaction fees.

Uncle blocks: valid blocks created nearly at the same time. A

miner gets 1.75 ETH for it.

7. Finality

A transaction has finality when it's part of a block that can't

change.

Two valid blocks can get mined at the same time, creating a
temp fork.

Eventually, one of the chains will become the accepted chain

after a subsequent block has been added, making it longer.

Finality is the time to wait before considering a transaction

irreversible.

Recommended time: 6 blocks or 1 minute.

After 6 blocks, you can say that the transaction was successful.

This timing doesn't include the transaction wait times picked up

by a miner.
8. PoW Energy Usage

PoW requires a lot of energy to keep the network safe.

For Ethereum, it's currently ~73.2 TWh annually (the amount of

a mid-size European country)

This could change with the switch to Proof of Stake.

9. PoW Pros

✅neutral: No ETH is needed to start and block rewards allow

you to go from 0ETH to a positive balance.

✅consensus mechanism tried and tested that worked for many

years.

✅pow it's relatively easy to implement compared to proof of

stack.

10. PoW Cons

❌uses up so much energy: bad for the environment.

❌big investment to start mining.

❌mining pools could dominate the game, leading to

centralization & security risks.

Proof of Stake

This is the new consensus that will be used by Ethereum.

1. What is Proof of Stake (POS)

Users stake their ETH to become VALIDATORS.

Validators responsibilities:
- ordering transactions
- creating new blocks

Improvements:
✅more energy efficiency
✅reduced HW requirements
✅more centralization immunity
✅more nodes
✅shard chains

2. POS & Validators

POS activates validators upon receipt of enough stake (32

ETH).

Validators are randomly chosen to create blocks

They are responsible for checking & confirming blocks they

don't create.

Users' stakes are used to incentivize good validator behavior.

3. Attesting

This validation is known as ATTESTING ("this block looks good

to me").

Validators:
- don't use much computational power
- create and validate blocks
- get rewards for proposing new blocks & for attesting

⚠You attest to malicious blocks => you lose the stake.

4. Sharded Chains

They are new separate blockchains.

They will need validators to process transactions & create

blocks.

They will have a shared understanding of the state.

They will be managed by the beacon chain.

5. Beacon chain

The beacon chain will coordinate the sharded chains

The beacon chain will:

- receive state info from shards
- sync network state
- manage validators

6. How validation will work

When you will submit a transaction on a shard, a validator will

be responsible for adding your transaction to a shard block.

Validators will be chosen by the beacon chain to propose new

blocks.

7. Committee

The attestation (not the transaction) is recorded in the beacon

chain.

Committee:
- 128+ validators are required to attest to each shard block.
- has a time frame ("Slot") in which to propose and validate a
shard block.
8. Epoch

Only one valid block is created per slot.

There are 32 slots in an "epoch."

After each epoch, the committee is disbanded and reformed.

✅This helps keep shards safe from bad actors.

9. Crosslink

A crosslink confirms:
- the inclusion of the block
- the transaction in the beacon chain.

The crosslink is created once a new shard block proposal has

enough attestations.

💰Once there's a crosslink, the validator gets the reward.

10. Finality

It's when a transaction is part of a block that can't change.

The block is finalized If 2/3 of the validators agree.

Validators lose their stake if they try and revert this later on
(51% attack).

11. Security

51% attack still exists but it's even riskier: you need 51% of the
staked ETH.

This is a lot of money, and it would cause ETH's value to drop.

The beacon chain will prevent bad behavior.

Validators will be responsible for flagging incidents.

12. POS Pros

✅easier to run a node. If you don't have enough ETH, you can
join staking pools.
✅more decentralization.
✅increased participation
✅more nodes don't mean increased % returns
✅more throughput: Shard chains allows to create of multiple
blocks at the same time

13. POS Cons

❌Can tend toward centralization

❌POS is still in its infancy
❌Less battle-tested, compared to proof-of-work
❌May not be as secure as proof of work

The future of NFTs ( Part 1 )

1. Vertical Marketplaces

NFT projects will shift towards DTC marketplaces like Larva

Labs and Solana Monkey Business. Managing user experience
is critical for retention, and eliminating 3rd parties doesn’t hurt.

The decentralization of code bases makes it possible.

2. “Soulbound” NFTs

NFTs are lauded for their transferability, but there are many use
cases for non-transferable tokens: driver’s licenses, diplomas,
certifications, proof of attendance, etc.

Soulbound NFTs lock in provenance, and can not be sold.

3. Retail

Retailers from 7-11 to Gamestop will use NFTs to incentivize

IRL transactions, leveraging creators to drive traffic to
storefronts.

For example, Yeezy NFTs that airdrop with purchases from Gap
stores, or NFTs that unlock exclusive features for Tesla
vehicles.

4. Borrowing Platforms

Because NFTs can unlock temporary access—like entry to

conferences—markets for short-term lending are emerging.   

5. NFT Indexes

Getting exposure to hundreds of NFTs via indexes will boom as

market movers tap collectors for funds.

Imagine a Christie’s NFT ETF. They have the influence to get

assets to liquidity—investors will ape into that.

It will also broaden support for NFT communities.

6. Bounties

Creators and brands will drop unique quests within

communities, rewarding completion with NFTs. This could be
anything from completing a questionnaire, to referring members
into the community, to attending events.

Bounties can be highly competitive, or open wide.

7. Social Investing

Web3 streamlines investing by reducing manual processes like

spreadsheet mgmt + signature collection.

It also acts as a social record—startups like

PartyRound will build networks around such activity, and
reinforce them with NFTs.

8. Legal

The benefits of block security and its ability to trigger

transactions via oracles will accelerate the adoption of web3
legal services + contract development.

9. Services

NFTs will unlock access to services and hobbyist communities.

Q&As and tutorials with influencer chefs, photographers,
doctors, and niche enthusiastic communities will boom.

This will also extend into IRL services like transportation,

hotels, and spas.

10. Content Submission

Users will submit content like short form videos, reviews, and
tutorials in exchange for NFTs. It’s a marketing flywheel.

Rights can be programmed into contracts so that the use of the

contributor’s content in advertising could yield them future
profits.

The future of NFTs ( Part 2 )

11. Activism

Communities where NFT ownership supports political causes

will gain traction as millions flow into community wallets.

Imagine environmental NFT collectives where sales are

directed towards lobbying efforts, and those efforts are
coordinated by a community DAO.

12. Social Feed Marketplaces

Social feeds based on NFT collections will emerge, providing

insight into the strategy of top collectors, and a platform for
collectors to interact.

These feeds will evolve into social commerce marketplaces,

featuring reviews, analytics, and more.

13. Multiplayer

NFTs will create hive activity by incentivizing group behavior.

MMORPGs that unlock levels once 10k users have aped in.
Airdrops of rare NFTs to collector cohorts that have signed
contracts to merge their base-layer NFTs.

Collecting is going to become a team sport.

14. Collateralization

To date, lenders have been averse to NFT holders borrowing

against their assets.

But as institutional $$$ flows in, and assets become better

stores of value, collateral markets will promise flexibility and
liquidity for all NFT holders, not just whales.

15. Fractionalization
Splitting up NFTs into individual shares gives more people
exposure to blue-chip assets, like owning a piece of a
cryptopunk.

The result? More liquidity for holders, and more appreciation of

blue chip assets as money enters the markets.

16. DeFi

As enthusiasts become more comfortable staking and farming

their holdings for yield, NFTs promise incentive beyond APY%.

NFTs will become base DeFi assets, with community access

included. These won't be simple savings plays—they'll also be
investments in communities.

17. Loyalty Exchanges

As brands and creators seek to reinforce loyalty, community

behavior will be rewarded with NFTs.
Did the member contribute content? NFT.
Complete surveys? NFT.
Make a purchase? NFT.

18. R&D

Brands and creators will exchange NFTs for insights on product

development: pain points, marketing claims, roadmap and
more.

The NFTs will unlock early access to product releases and

potential profit sharing. Brands will track and maintain these
key relationships.

Tokens are more liquid and bragworthy than traditional discount

codes.
19. Customer Cohort NFTs

Imagine receiving an NFT for being one of the first Air Jordan
customers, and how valuable that would be today. How Nike
might reward you years later with special access and product.

Cohort NFTs prove that you took a certain action, at a certain

time.

20. Education and Customer Support

Upon demonstrating exceptional knowledge of a brand’s

product, users can receive NFTs in exchange for onboarding
newbies into the community, or providing support.

This can be exponentially more impactful than a brand

employee doing the same.

21. Leaderboards

NFT communities will gamify by highlighting the performance

and participation of top holders.

Top contributors will receive rewards and clout, thereby

incentivizing communities to hold and participate in order to
secure better returns on their investments.