UNIT-II:CONSENSUS & DAPPS

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Requirements for Consensus Protocols

A consensus protocol in blockchain should ensure:

  • Security: Protection against attacks (e.g., 51% attack, Sybil attack).

  • Decentralization: No single entity should control the network.

  • Scalability: Should efficiently handle an increasing number of transactions.

  • Finality: Once a transaction is confirmed, it should be irreversible.

  • Energy efficiency: Minimized resource consumption, particularly for permissioned blockchains.

Proof of Work (PoW)

  • Used in Bitcoin and other blockchains.

  • Miners solve complex mathematical puzzles to validate transactions.

  • Pros: High security, decentralized, proven stability.

  • Cons: Energy-intensive, slow transaction speeds, scalability issues.

Scalability Aspects of Blockchain Consensus Protocols

  • On-chain scaling: Increasing block size (e.g., Bitcoin Cash) or optimizing transaction processing.

  • Off-chain scaling: Solutions like Lightning Network, sidechains, rollups.

  • Sharding: Splitting blockchain into smaller pieces (Ethereum 2.0).

  • Layer-2 solutions: State channels, Plasma, Optimistic Rollups.

Permissioned Blockchains

Design Goals of Permissioned Blockchains

  • Controlled participation: Only authorized entities can participate.

  • Higher efficiency: Faster transactions and lower energy consumption.

  • Privacy: Restricted data visibility for non-participants.

  • Compliance: Regulatory-friendly solutions.

Consensus Protocols for Permissioned Blockchains

  • PBFT (Practical Byzantine Fault Tolerance): Used in Hyperledger Fabric, ensures high performance.

  • Raft Consensus: Leader-based protocol for fast consensus (used in Corda).

  • PoA (Proof of Authority): Validators are pre-approved entities (used in VeChain, Ethereum private chains).

Decentralized Applications (DApps)

Characteristics of DApps

  • Open-source: Code is publicly available.

  • Decentralized: Runs on a blockchain network.

  • Smart contracts: Self-executing contracts manage operations.

  • Incentivized: Token economy drives user participation.

Private Blockchain Setup

Steps to set up a private blockchain:

  1. Choose a platform: Ethereum (Geth), Hyperledger Fabric, Quorum, Multichain.

  2. Node configuration: Define participating nodes and roles.

  3. Consensus selection: PBFT, Raft, PoA.

  4. Smart contract deployment: Automate business logic.

  5. Security & access control: Set permissions and policies.

Multichain and Its Deployment

Multiple Configurable Blockchains using Multichain

  • Multichain enables the creation of private blockchain networks with customized parameters (e.g., block size, mining speed, consensus rules).

Deployment Scenarios of Multichain

  • Centralized currency settlement: Used by financial institutions to settle payments.

  • Bond issuance & P2P trading: Secure and transparent asset tokenization and trading.

  • Consumer-facing rewards scheme: Used in loyalty programs, tokenized rewards

    Centralized Currency Settlement in Blockchain

    Centralized currency settlement refers to using blockchain for clearing and settling transactions while maintaining control by a central entity (e.g., a bank or financial institution).

    Key Features:

    Faster Settlement: Reduces transaction settlement time from days to seconds.
    Lower Costs: Eliminates intermediaries, reducing fees.
    Improved Transparency: Transactions are recorded immutably.
    Regulatory Compliance: Private or permissioned blockchains allow KYC/AML enforcement.

    Examples of Use Cases:

    • Central Bank Digital Currencies (CBDCs): Countries like China (Digital Yuan) and Europe (Digital Euro) use blockchain for digital fiat currency settlement.

    • Interbank Transfers: JPM Coin by JPMorgan facilitates faster cross-border transactions.

    • Stablecoins: USDT, USDC, and other stablecoins provide real-time settlement between exchanges and institutions.

    Bond Issuance and Peer-to-Peer (P2P) Trading on Blockchain

    Blockchain is transforming bond issuance and P2P trading by making financial markets more accessible, transparent, and efficient.

    Bond Issuance on Blockchain

    Tokenized Bonds: Bonds are issued as blockchain-based tokens, making them tradable and programmable.
    Instant Settlement: Eliminates reliance on intermediaries like clearinghouses.
    Global Access: Investors worldwide can participate without geographical restrictions.
    Transparency & Security: Every transaction is recorded immutably.

    Examples:

    • World Bank’s “bond-i”: First blockchain-based bond issued in 2018.

    • Santander’s Digital Bond: Spanish bank issued the first end-to-end blockchain bond.

    P2P Trading on Blockchain

    Peer-to-peer (P2P) trading eliminates intermediaries and allows direct transactions between users.

    No Third Parties: Users trade directly using smart contracts.
    Lower Costs: No broker fees, reduced compliance costs.
    Automated Execution: Smart contracts enable automatic settlement.
    Trustless Transactions: Escrow mechanisms ensure fair trades.

    Examples of P2P Trading:

    • Decentralized Exchanges (DEXs): Uniswap, PancakeSwap, and Sushiswap.

    • Security Token Offerings (STOs): Tokenized real estate, company shares, and bonds traded on platforms like Polymath or tZERO.

    • NFT Marketplaces: OpenSea, Rarible allow direct trading of digital assets.

    Consumer-Facing Rewards in Decentralized Applications (DApps)

    Decentralized Applications (DApps) use blockchain for reward systems in loyalty programs, gaming, and financial incentives.

    Key Benefits of Blockchain-based Rewards Systems:

    Transparency: Users can verify reward distributions on the blockchain.
    No Central Authority: Eliminates reliance on banks or third parties.
    Interoperability: Rewards can be used across multiple platforms.
    Security: Fraud and double-spending are prevented through cryptographic verification.

    Use Cases:

    🔹 Retail & E-commerce:

    • Loyalty Points Tokenization: Starbucks’ Odyssey program uses blockchain to track and distribute rewards.

    • Universal Reward Tokens: Users can earn and redeem tokens across multiple merchants.

    🔹 Gaming & NFTs:

    • Play-to-Earn (P2E) Games: Axie Infinity, Decentraland reward players with cryptocurrency or NFTs.

    • NFT-based Loyalty Rewards: Players earn tradable in-game assets that hold real-world value.

    🔹 Financial & DeFi Applications:

    • Yield Farming & Staking: Users earn rewards for providing liquidity (e.g., Aave, Compound).

    • Cashback in Crypto: Crypto.com offers cashback rewards in CRO tokens for transactions.

    Example: Brave Browser Rewards

    • Brave Rewards lets users earn Basic Attention Token (BAT) for watching ads, a direct blockchain-based rewards system.

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