Blockchain Protocols

MODULE 6
Overview
• Ethereum tokens
• Augur
• Golem
• Understanding Ethereum tokens
• App Coins and Protocol Tokens
• Blockchain Token Securities Law Framework
• Token Economy
• Token sale structure
• Ethereum Subreddit
Ethereum Tokens
• Ethereum tokens are digital assets built
on top of the Ethereum blockchain.
• Unlike ETH (Ether), the native currency
used for gas fees and staking, tokens are
created using Ethereum’s smart
contract functionality.
• They extend Ethereum’s capabilities by
allowing developers to design
currencies, assets, governance rights,
or utility functions that can be traded or
programmed.
Ethereum Tokens
Token Standards in Ethereum

• Ethereum provides standardized frameworks to ensure tokens

behave consistently across wallets, exchanges, and DApps.
• ERC-20 (Fungible Tokens)

• ERC-721 (Non-Fungible Tokens – NFTs)

• ERC-1155 (Multi-Token Standard)

• Other Token Standards

ERC-20 (Fungible Tokens)
• Introduced in 2015.
• Defines a common set of rules for tokens to be fungible (every token is
identical).
• Widely used for cryptocurrencies, stablecoins, and governance tokens.
• Examples:
• USDT (Tether) – stablecoin pegged to USD.
• UNI (Uniswap) – governance token for Uniswap DEX.
• LINK (Chainlink) – oracle network token.
• Core Functions:
• transfer() → move tokens.
• balanceOf() → check balance.
• approve() + transferFrom() → allow third-party spending.
ERC-721 (Non-Fungible Tokens – NFTs)
• Introduced in 2017, formalized in 2018.
• Defines unique, indivisible tokens → each token has its own ID and
metadata.
• Ideal for collectibles, gaming items, certificates, real-world asset
tokenization.
Examples:
• CryptoKitties (digital collectibles).
• Bored Ape Yacht Club (NFT collection).
• Decentraland LAND (virtual real estate).
Key Features:
• Unique ownership tracked on-chain.
• Cannot be swapped 1:1 like fungible tokens.
• Metadata often points to IPFS or external storage for digital art.
ERC-1155 (Multi-Token Standard)

• Created by Enjin (2018).

• Allows a single contract to manage both fungible and non-

fungible tokens.

• Example: In a game → same contract can hold gold coins (ERC-20

type) and unique swords (ERC-721 type).

• Increases efficiency and reduces gas costs.

Other Token Standards
• ERC-777 → Advanced fungible
token, adds operator-based
transfers.

• ERC-4626 → Standard for

tokenized vaults (DeFi yield
strategies).

• ERC-2981 → NFT royalty

standard (automatic creator
royalties).
Types of Ethereum Tokens
• Utility Tokens – provide access to a service (e.g., BAT for Brave browser
ads).
• Governance Tokens – voting rights in DAOs (e.g., COMP for
Compound).
• Stablecoins – pegged to fiat (e.g., DAI, USDC, USDT).
• Security Tokens – represent shares/investments (regulated).
• NFTs – unique digital or physical assets (art, music, land deeds).
Utility Tokens
• Definition: Tokens designed to give users access to a product or
service within a blockchain ecosystem.
• Function: Work like “vouchers” or “tickets” — they enable interaction
with DApps but do not grant ownership in the company or protocol.
• Examples:
• BAT (Basic Attention Token) → Used in the Brave browser to reward users for
viewing ads and to pay publishers.
• Filecoin (FIL) → Users pay with FIL to store/retrieve data on the Filecoin
decentralized storage network.
• Golem (GLM) → Token used to pay for decentralized computing power.
• Key Point: Utility tokens drive demand within an ecosystem but are
not meant for investment purposes (though they may gain speculative
value).
Governance Tokens
• Definition: Tokens that grant holders voting rights in decentralized
protocols or DAOs (Decentralized Autonomous Organizations).
• Function: Represent decision-making power — holders vote on
proposals like fee changes, treasury spending, or protocol upgrades.
Examples:
• COMP (Compound Finance) → Token holders vote on lending protocol
parameters (e.g., interest rate models).
• UNI (Uniswap) → Holders vote on proposals for liquidity mining, treasury use,
and protocol upgrades.
• AAVE (Aave Protocol) → Governance token for risk parameters and feature
development in the lending protocol.
• Key Point: Governance tokens make protocols community-driven rather than
controlled by a single company.
Stablecoins
• Definition: Tokens pegged to stable assets (usually fiat currencies like USD) to reduce volatility.
Types:
• Fiat-collateralized → Backed by bank reserves (e.g., USDC, USDT).
• Crypto-collateralized → Backed by crypto assets, often overcollateralized (e.g., DAI on
MakerDAO).
• Algorithmic stablecoins → Use supply-demand balancing mechanisms (e.g., UST/Luna —
collapsed in 2022).
Examples:
• DAI → Maintains ~$1 peg using crypto collateral and MakerDAO governance.
• USDC (Circle) → Fiat-backed, audited reserves.
• USDT (Tether) → Widely used stablecoin, though with transparency controversies.
• Key Point: Stablecoins are the backbone of DeFi, enabling trading, lending, and payments without
volatility risk.
Security Tokens
• Definition: Tokens that represent ownership rights, shares,
bonds, or other financial securities, subject to regulation.
• Function: Provide investors with legal rights, such as dividends,
revenue share, or equity.
Examples:
• tZERO → Security token platform for equity trading.
• SPiCE VC → Tokenized venture capital fund.
• Harbor → Tokenized real estate investment offerings.
• Key Point: Security tokens are regulated under securities law (e.g., SEC
in the U.S.) and differ from utility tokens because they are tied to profit
expectations and ownership.
NFTs (Non-Fungible Tokens)
• Definition: Unique, indivisible tokens representing digital or physical
assets.
• Function: Enable proof of ownership, authenticity, and scarcity for assets
recorded on blockchain.
Examples:
• Art: Beeple’s “Everydays” NFT sold for $69M on Christie’s.
• Music: Artists tokenizing albums (e.g., Kings of Leon NFT album).
• Gaming: Axie Infinity NFTs represent in-game creatures with unique attributes.
• Real Estate: Tokenized deeds of property ownership.
Standards:
• ERC-721 → One-of-a-kind NFTs.
• ERC-1155 → Hybrid tokens (fungible + non-fungible).
• Key Point: NFTs create a digital property rights layer for art, collectibles, gaming, and
real-world assets.
Role in DeFi and DAOs
• DeFi (Decentralized Finance): Tokens fuel lending, borrowing, yield
farming, liquidity pools. Example: AAVE token in lending protocol.

• DAOs (Decentralized Autonomous Organizations): Governance

tokens allow members to vote on proposals. Example: MakerDAO
(MKR) controls DAI stablecoin policy.

• Staking & Incentives: Tokens are staked to secure protocols (ETH in

Ethereum 2.0 PoS).
Technical Backbone – How Tokens Work?
• Tokens are smart contracts deployed on Ethereum.

• A token contract defines:

• Total supply (fixed or inflationary).
• Balances (mapping addresses to token amounts).
• Transfer rules.

• Once deployed, tokens can be traded, integrated into DApps, or

programmed into DeFi protocols.
Challenges of Ethereum Tokens

• Gas Fees: High costs during network congestion.

• Security Risks: Smart contract bugs or exploits.

• Scalability: Limited throughput, though improved by Ethereum 2.0 +

Layer-2 (Polygon, Arbitrum, Optimism).

• Regulation: Tokens may fall under securities law, especially in ICOs.

Augur
• Augur is a pioneering dApp that shows how Ethereum tokens can be used for
prediction markets, enabling decentralized, incentive-driven truth reporting. Its
REP-based oracle mechanism demonstrates one of the first real-world
applications of tokenized reputation in blockchain governance.
• Category: Decentralized Prediction Market.
• Blockchain: Ethereum.
• Native Token: REP (Reputation Token).
• Goal: Allow anyone to create and trade on prediction markets about real-world events in a
decentralized, censorship-resistant, and trustless way.
System Architecture
1. Market Creator
• Any user can create a prediction market (e.g., election outcome, sports match result).
• Provides liquidity by depositing ETH/DAI initially.
• Pays fees to Augur’s protocol for using the infrastructure.
2. Traders (Speculators)
• Buy and sell “shares” representing different possible outcomes (Yes/No, or multiple-choice).
• Prices of shares fluctuate based on demand → reflect the probability of outcomes.
3. Reporters (Oracles)
• REP token holders who report the real-world outcome after the event concludes.
• Stake REP tokens to back their report.
• Dishonest reporters lose their stake; truthful reporters gain rewards.
4. Smart Contracts (Settlement Layer)
• Manages market creation, trading, reporting, dispute resolution, and payout.
• Enforces rules automatically (no need for centralized bookmakers).
5. Payout System
• Once final outcome is reported and disputes (if any) are settled, traders holding winning
outcome shares are paid automatically in ETH or stablecoins.
System Architecture
Market Creator
(Creates Prediction)

Smart Contracts
(Market Registry, Trading,
Settlement)

Traders Reporters
Buy / Sell Shares Stake REP Report

Settlement & Payout

Winning side paid
Losers lose stake
Working of Augur
Step 1: Market Creation
• A user creates a market: “Will Candidate X win the 2028 U.S. Presidential Election?”
• Market creator specifies possible outcomes (Yes/No).
• Smart contract is deployed with event details, expiration date, and initial liquidity.
Step 2: Trading
• Traders buy shares of “Yes” or “No.”
• If a share trades at $0.70, it means the market estimates a 70% chance of “Yes.”
• Users can sell shares at any time before resolution (like betting odds).
Step 3: Reporting
• Once the event occurs, REP token holders (reporters) stake REP to declare the outcome.
• Example: “Yes” → Candidate X won.
• If disputes arise, additional rounds of staking occur until consensus is reached.
Step 4: Settlement
• Once the outcome is finalized:
• Winning shares are redeemable for $1 each.
• Losing shares are worthless.
• Reporters who reported truthfully are rewarded with REP; dishonest ones lose staked REP.
Token Role – REP
• Primary Utility: Reputation token used for reporting outcomes.

• Staking: Reporters stake REP to ensure truthfulness.

• Incentives:
• Honest reporting → earn fees from markets.
• Dishonest reporting → lose REP (economic penalty).

• Circulation: REP is not used for trading bets (that’s in ETH/DAI); it is

purely for oracle security.
Detailed Case Study Example
Case: FIFA World Cup 2030 Final
• Market Creation: A market is created — “Will Country A win the FIFA World
Cup 2030 Final?” with outcomes: Yes / No.
• Trading:
• Early odds → Yes at $0.45, No at $0.55.
• As tournament progresses, Yes climbs to $0.80 if Country A is strong.
• Event Resolution:
• Match ends, Country A wins.
• REP reporters confirm “Yes.”
• Payouts:
• Traders holding “Yes” shares redeem them for $1 each.
• “No” shares become worthless.
• Reporter Incentives:
• REP reporters who reported “Yes” earn rewards.
• Any dishonest reports are slashed.
Significance of Augur
[Link]: No central bookmaker; censorship-resistant.

[Link] Power: Markets aggregate information → often predict outcomes better

than polls.

[Link] Truth: REP creates economic incentives for accurate reporting.

[Link] Cases: Elections, sports, weather, financial markets, entertainment events.

[Link]: Demonstrates how Ethereum smart contracts + tokens replace

centralized betting with trustless, transparent markets.
Challenges & Limitations

• Low Adoption: Complex UX, regulatory uncertainty around

betting.

• Liquidity Issues: Hard to attract enough traders in niche markets.

• Oracle Reliability: Still depends on REP reporters; risk of

collusion.

• Scalability: Ethereum congestion can cause delays & high fees

GOLEM

• Golem represents one of the most practical applications of

blockchain beyond finance: a global decentralized computing
marketplace.

• By aligning incentives via the GLM token, Golem transforms idle

computing resources into a trustless, censorship-resistant
alternative to centralized cloud providers, suitable for
industries like film, gaming, AI, and scientific research.
GOLEM

• Category: Decentralized Computing Power Marketplace.

• Blockchain: Ethereum (with off-chain computational tasks).

• Native Token: GLM (Golem Network Token, formerly GNT).

• Goal: To create a “Decentralized Supercomputer” by pooling

idle computing resources (CPU/GPU) worldwide and renting them
out for demanding tasks.
System Architecture
• Golem connects requesters (who need computing power) with providers (who supply it) through
Ethereum-based smart contracts.
Key Components
1. Requester
• User needing computational resources (e.g., an animation studio rendering video).
• Submits tasks to Golem and pays providers in GLM tokens.
2. Provider
• Any participant with spare CPU/GPU cycles.
• Executes tasks and returns results.
• Earns GLM tokens as reward.
3. Application Registry
• Stores approved applications (e.g., Blender for 3D rendering).
• Ensures only licensed and trusted software is used, preventing plug-in or asset leaks.
4. Task Manager (Smart Contracts)
• Handles task splitting, verification, and distribution.
• Ensures multiple providers can work on different parts of the same job.
5. Payment System
• Payments are handled via Ethereum smart contracts.
• Escrow system ensures providers only get paid once verified results are delivered.
System Architecture
Requester
(Animation Studio or Research Lab)

Task Manager
(Smart Contracts)

Application Registry Payment Escrow

Providers
(CPU/GPU Nodes)

Verified Results + GLM Payment Distribution

Working of Golem
Step 1: Task Submission
• Requester (e.g., animation studio) submits a rendering task.
• Task is divided into smaller chunks (e.g., 10,000 frames split into 1,000 parts).
Step 2: Application Verification
• The Application Registry ensures tasks only run with approved/licensed apps (e.g., Blender rendering
engine).
• Prevents risk of unlicensed software or asset leaks.
Step 3: Task Execution
• Providers accept jobs, run computations on local machines, and return results.
• Tasks may be distributed across multiple providers to save time.
Step 4: Result Verification
• Results are validated using redundant execution and cryptographic proofs.
• Incorrect or malicious results are rejected; honest providers are rewarded.
Step 5: Payment Settlement
• Once results are verified, smart contracts release GLM tokens from escrow to providers.
• Requester receives completed job outputs.
Token Role – GLM
• Utility: GLM is used as the currency of the Golem ecosystem.

• Requester → Provider Payments: Providers receive GLM for processing

tasks.

• Incentive Mechanism: Encourages global users to share idle

computing resources.

• Escrow Security: Smart contracts lock GLM tokens until results are
verified.
Detailed Case Study Example
Problem:
• A biotech research institute needs to process massive DNA sequencing datasets (several
terabytes) for genome assembly and analysis. Traditional cloud services (AWS, Google
Cloud) are expensive and pose data sovereignty risks since genomic data must stay within
jurisdictional boundaries.
Centralized Cloud Option:
• High costs for computation and storage.
• Risk of vendor lock-in and dependency on a few cloud providers.
• Regulatory barriers for handling sensitive medical data across borders.
Golem Solution:
• The institute submits sequencing workloads to the Golem Network.
• Jobs are broken into smaller tasks (e.g., genome alignment and variant calling).
• Approved bioinformatics tools (e.g., BLAST, Bowtie) are verified via the Golem Application Registry.
• Hundreds of global providers (universities, research labs, independent nodes) contribute idle CPU/GPU power.
• Results are validated through redundant computations and cryptographic checks.
• Verified providers are paid in GLM tokens via Ethereum smart contracts.
Detailed Case Study Example
Outcome:
• Reduced cost compared to centralized cloud solutions.
• Accelerated processing — genome assembly completed in days
instead of months.
• Secure handling of genomic data through licensed-only
application registry and controlled provider selection.
• Providers worldwide earn income by contributing computing
resources, fostering global scientific collaboration.
Significance of Golem
[Link] of Computing: Anyone with a computer can become
a provider.
[Link] Supercomputer: Aggregates global idle resources into
powerful computing clusters.
[Link] Efficiency: Cheaper than centralized cloud services.
[Link] Resistance: No single entity controls computing jobs.
[Link] Cases Beyond Rendering:
• AI/ML model training.
• DNA sequencing in bioinformatics.
• Financial risk modeling.
• Scientific simulations (climate models, physics).
Challenges & Limitations
• Adoption Barriers: Enterprises still prefer centralized cloud for
reliability.
• Performance Variability: Providers differ in speed, hardware, and
uptime.
• Network Latency: Splitting and retrieving tasks across
geographies can introduce delays.
• Verification Overhead: Ensuring honest computation adds extra
cost.
• Token Dependency: Requires stable demand for GLM token to
sustain the ecosystem.
App Coins
• Definition: Tokens created for use within a specific decentralized
application (dApp).
• Purpose: Provide access to app-specific services, rewards, or
functionality.
• Scope: Limited to the ecosystem of that application.
• Examples:
• BAT (Basic Attention Token) → Used in the Brave browser for rewarding users
who view ads.
• REP (Augur) → Used in Augur for reporting outcomes in prediction markets.
• GLM (Golem) → Used to pay for computational power in the Golem Network.
• Key Point: Think of app coins as “in-app currencies” — valuable only
within their ecosystem.
Protocol Tokens
• Definition: Tokens that form the underlying economic layer of a blockchain
protocol.
• Purpose: Secure the network (via mining/staking), pay for transaction fees,
and incentivize validators.
• Scope: Broader — supports multiple dApps built on top of the protocol.
Examples:
• ETH (Ethereum) → Used for gas fees, staking, and securing the Ethereum network.
• BTC (Bitcoin) → Native token securing the Bitcoin blockchain.
• DOT (Polkadot) → Powers governance, staking, and interoperability in the Polkadot
ecosystem.
• Key Point: Protocol tokens are fundamental building blocks of blockchain
infrastructure.
App Coins vs. Protocol Tokens

Feature App Coins Protocol Tokens

Scope Used inside a single dApp Powers the entire blockchain protocol

Rewards, access, and functionality Transaction fees, security, governance

Utility
within app of protocol

Examples BAT, REP, GLM ETH, BTC, DOT

Rely on the underlying blockchain to The base layer itself (other tokens
Dependency
function depend on it)

Analogy Like gift cards/tickets for one platform Like electricity that powers all platforms
App Coins (DApp-Specific Tokens)
App coins = in-app currency → drive
Advertising & Rewards engagement, payments, and
• BAT (Basic Attention Token) in Brave browser: governance within single
• Users earn BAT for viewing ads.
• Publishers receive BAT as ad revenue. applications.
Prediction Markets
• REP (Augur):
• Reporters stake REP to verify outcomes of sports/election markets.
• Incentivizes truthful reporting.
Decentralized Computing
• GLM (Golem):
• Requesters pay in GLM for CPU/GPU power.
• Providers earn GLM for completing tasks like video rendering or AI model training.
Gaming Economies
• AXS & SLP (Axie Infinity):
• Used for breeding, playing, and trading in-game assets.
Lending/Borrowing Protocols
• COMP (Compound):
• Used to incentivize users and provide governance rights for loan parameters.
Protocol Tokens (Blockchain-Level Tokens)
Transaction Fees (Gas)
• ETH (Ethereum):
• Every transaction (sending tokens, minting NFTs, running smart contracts) requires ETH gas fees.
Staking & Security
• DOT (Polkadot), ADA (Cardano):
• Token holders stake tokens to secure the network.
• Earn staking rewards while validating blocks. Protocol tokens = blockchain
Governance of Protocol Rules fuel → essential for security,
• DOT (Polkadot): transactions, and governance
• Token holders vote on protocol upgrades and parachain auctions.
• Tezos (XTZ): at the protocol level.
• On-chain governance with token-weighted voting.
Interoperability & Incentives
• ATOM (Cosmos):
• Used for cross-chain communication and staking.
Store of Value & Settlement
• BTC (Bitcoin):
• Acts as digital gold.
• Used for global settlement without intermediaries.
Use Case 1: App Coins
The Brave Browser is designed to protect user privacy and block intrusive ads.
Traditional advertising relies on intermediaries like Google or Facebook, who take a
large cut of ad revenue while exploiting user data. Brave wants to create a privacy-
preserving, decentralized advertising model that rewards users directly.
Application (App Coin: BAT – Basic Attention Token)
• ublishers and conteUsers opt-in to view ads and earn BAT tokens as a reward for their
attention.
• Advertisers pay in BAT to place ads.
• Pnt creators are rewarded in BAT for quality content.
Outcome
• Users are compensated for their time and data → fairer digital economy.
• Publishers earn directly, without losing revenue to middlemen.
• Advertisers get better targeting because users voluntarily engage.
• Key Point: BAT is an app coin because it only works inside the Brave Browser
ecosystem and is not required for the Ethereum protocol itself.
Use Case 2: Protocol Tokens
The Ethereum blockchain powers thousands of decentralized applications
(DeFi apps, NFTs, DAOs). For the system to work, every transaction (token
transfers, smart contract execution, minting NFTs) must be validated by
miners/validators. To ensure network security and incentivize validators,
Ethereum uses its native protocol token (ETH).
Application (Protocol Token: ETH – Ether)
• Gas Fees: Every dApp interaction requires ETH to pay for computational power.
• Example: A user minting an NFT must pay gas fees in ETH.
• Staking: Validators lock up ETH to secure the Ethereum network (Proof-of-Stake).
• Settlement Layer: ETH acts as a universal settlement currency across DeFi protocols.
Outcome
• The Ethereum network remains secure and censorship-resistant.
• Developers can build any kind of dApp, knowing ETH provides universal fuel for
transactions.
• ETH serves as the backbone of the Ethereum economy, unlike app coins that are
application-specific.
• Key Point: ETH is a protocol token because it powers the entire Ethereum
blockchain infrastructure and not just one app.