What is a Crypto Protocol?
Crypto protocols are sets of rules and procedures that govern how cryptocurrencies and blockchain networks function.
They are fundamental to blockchain networks, enabling the secure and reliable use of cryptocurrencies and the networks that enable them. They form a vital component of the underlying infrastructure that has made the current state of blockchains and the cryptocurrency industry possible.
Crypto Protocols Explained
Crypto protocols govern how a blockchain network can function, its security, and what its users can do with it. For example, they usually include a consensus mechanism such as proof-of-work (PoW) or proof-of-stake (PoS) that governs how transactions are processed and validated securely.
These aren’t the only kinds of crypto protocols, however. They can be built on top of blockchains that support smart contracts or similar mechanisms, such as Ethereum.
These foundations are what enable the blossoming world of decentralized finance (DeFi), filled with apps that enable lending, borrowing, staking, and more. Like the protocols that enable entire blockchains, application-level crypto protocols act as the foundation of an application and enable its security functionality.
Difference Between Crypto Protocols and Internet Protocols
Crypto protocols may sound similar to Internet protocols, but they serve distinctly different purposes. Internet protocols, such as HTTPS or Transmission Control Protocol/Internet Protocol (TCP/IP), govern how data is transmitted across the Internet. They handle routing, addressing, and various other aspects of Internet communication.
On the other hand, crypto protocols work on top of internet protocols to create entirely new blockchain networks and applications with additional functionality and layers of security. Instead of walling off data behind apps and platforms like on the internet, data on blockchains are stored on a decentralized ledger that is open for anyone to check and verify.
What Are Some Popular Crypto Protocols?
Several popular crypto protocols have emerged in recent years, each tailored to address specific needs. These protocols serve as the bedrock for innovation within the crypto industry, facilitating the decentralization of numerous services.
For instance, the Bitcoin protocol, which pioneered the concept of digital peer-to-peer payments, has solved the issue of double spending via the implementation of a proof-of-work consensus mechanism. Another prominent crypto protocol is the Ethereum blockchain, which revolutionized the industry by introducing smart contracts.
Smart contracts are deterministic functions that act as the building blocks for more intricate systems. Thanks to these contracts, Ethereum is capable of replicating the services provided by traditional financial institutions through the power of code alone. This has given rise to DeFi, which encompasses a wide array of financial services solely executed through the Ethereum protocol.
Numerous other crypto protocols have also emerged, each catering to specific use cases. AAVE, UniSwap, and Curve are some other popular protocols that facilitate activities such as token swaps, staking, margin trading, lending, providing liquidity, and a plethora of other functions.
Why Are Crypto Protocols Important?
In crypto, protocols form most of the vital infrastructure that makes blockchains and cryptocurrencies possible. Without them, the decentralizing power of Bitcoin, Ethereum, non-fungible tokens (NFTs), and more wouldn’t exist.
Crypto protocols provide this assurance by employing simple but powerful cryptographic techniques that make it exceedingly difficult to take control of the network for malicious (or other) purposes.
How Do Crypto Protocols Make Money?
Instead of generating revenue directly through subscriptions or advertisements, many crypto protocols have their own native cryptocurrencies. These cryptocurrencies often act as utility tokens within the protocol’s ecosystem, enabling users to access and utilize the services provided. Some protocols raise money using a fee model where developers have to pay to use the protocol.
Crypto protocols are sometimes called fat protocols compared to internet protocols which are often referred to as thin. This is because they hold much more power to generate revenue than internet protocols. For example, the creators of the Ethereum protocol, like Vitalik Buterin, are much more wealthy than the inventors of TCP/IP.
Crypto protocols may also opt for other means of generating income, such as conducting token sales or initial coin offerings (ICOs), where investors purchase tokens to help fund the development and maintenance of the protocol.
Furthermore, many crypto protocols provide services that replace a centralized service with a decentralized version running purely based on smart contracts. These protocols charge a fee based on the services they provide, which is usually a tiny fraction of the transaction volume.
The Bottom Line
Crypto protocols play a vital role in the cryptocurrency revolution, acting as the base layer of blockchains and applications and maintaining their security. They ensure that information transmitted over networks remains open to all and tamper-proof, protecting individuals and organizations from cyber threats, theft, middlemen abusing their power, and more.
