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What is a Protocol? Protocol Meaning
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What Are Protocols in Crypto and How Do They Work?

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With 25+ years of financial marketing experience, Niki has an extensive knowledge of the forex, fintech, stocks and cryptocurrency sectors. Niki is a founder and director at the Contentworks agency.
By Niki Nikolaou
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With 25+ years of financial marketing experience, Niki has an extensive knowledge of the forex, fintech, stocks and cryptocurrency sectors. Niki is a founder and director at the Contentworks agency.
on March 07, 2023 | 6 min
Updated on Jan 22, 2024
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Charles Archer
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Charles Archer is an experienced financial writer specialising in monetary law. With a background in stock market and private equity analysis, he’s worked for many years as a freelance investment author, and has had articles published in a wide range of regional and national titles, both online and in print. He holds a Master’s degree in Law from the University of Law, the UK’s largest legal training institution. Charles believes the key to successful investing lies in quality research, and aims to offer a unique viewpoint that investors cannot find elsewhere.
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Even if you’ve never traded or invested in cryptocurrencies, it is difficult to ignore the phenomenal growth of the ecosystem. You’ve also likely come across related concepts including DeFi (decentralized finance), NFTs (non-fungible token), Metaverse, and dApps (decentralized applications).

 

Bitcoin brought blockchain technology into the limelight, and its underlying protocol has disrupted almost every industry. But what does a protocol have to do with money and how a could it, not just revolutionize the value exchange mechanism, but also gave birth to a whole new form of economy – the digital economy? So, what does a protocol mean in crypto? This article answers this question and explains how blockchain is connected to cryptocurrency.

What is a Protocol? – Protocol Meaning

A protocol is a set of rules that govern how data or information is formatted, secured, and transmitted electronically on a network. These rules enable seamless communication among different types of devices on it. For instance, a network may have a mobile device with an Android operating system (OS), a computer with Linux and another with Windows, and so on. Yet, all will communicate through the rules defined for communication on the network, which is known as the protocol of the network.

Many factors, such as the type of data to be communicated, network security, and data sensitivity, are considered in the design one or more protocols that function as the ultimate rulebook for the network. A network protocol has three main tasks: management, communication facilitation, and ensuring security.

Why are Protocols Important?

Communication is only complete when the receiver understands the message. Protocols define the functions of the sender and the receiver for effective communication on a network of devices.

A blockchain needs a protocol because it is is a digital ledger, which means it records all transactions in the form of blocks linked together to form a chain. This chain is maintained by the devices on the network without a central controlling entity. This is known as decentralised governance. The blockchain protocol defines the rules for the creation, addition, verification, and propagation of transactions throughout the network. Once a block is complete, it is validated and then attached to the existing chain of blocks to grow the blockchain.

What is a Crypto Protocol?

Cryptocurrencies do not have any intrinsic value and derive their value from the strength of the protocol, which may include the data, encryption to secure this data, and how the data is shared. The underlying blockchain structure determines the protocol. Essential tasks of a crypto protocol are:

Data security

It must ensure that the data remains secure as often blockchain protocols deal with the transaction of money. The first popular blockchain was for transacting with Bitcoin, a digital currency. It means that all the money (value) in the system should remain secure with the owner and be moved only after the owner permits and the network approves.

Decentralisation

Every entity on the network has the authority to change the blockchain (according to the rules, of course). Any transaction must be verified with the help of designated network members and no central authority should control the assets in the system.

Data Consistency

The protocol should facilitate maintaining consistency of the state of the blockchain throughout the network. It enforces the rule that all network members must always be updated with the latest state of the system, which means the distribution of value in the network.

Scalability

Blockchains are meant to scale as the data increases. So, the protocol must facilitate an increasing number of transactions without delaying the blockchain updates to maintain the integrity of the network.

How Do Crypto Protocols Work?

A crypto protocol provides the complete infrastructure for storing, transacting, and securing cryptocurrency. All transactions abide by a set of rules for maintaining and growing the network. It lays down the rules for the following:

  • Add a new transaction.
  • Verify a transaction.
  • Who can and cannot verify a transaction?
  • Add the transaction to the block.
  • Validate the block.
  • Add the block to the chain.
  • Who can and can’t validate or add the block to the chain?
  • Propagate the new chain across the network.

What are Thin Protocols and Fat Protocols?

The concept of protocol thickness was invented in 2016 by Joel Monegro, who defined it as the extent to which a protocol could capture the value of a business use case. A protocol that aggregates a major part of the value is called a fat protocol, and the that does not is a thin protocol. Here, value is aggregated in the application running on the protocol. The value he was referring to is capitalisation.

Thin protocols and Fat protocols in Crypto

With the previous TCP/IP and other internet protocols, most of the value was aggregated in the applications that used the protocol, while the protocol was a mere rulebook of data transfer. Blockchain reversed this scenario. This technology forms a shared data layer across the network, aggregating most of the value in this data. The applications running on top of it are now interpreters of that value. The adoption of the protocol amplifies its value. Monegro also clarified that adoption depends on the protocol token in addition to the shared data layer and the openness of the network.

 

For instance, the token in the case of Bitcoin is transactions, for Ethereum it is computing power, and for Sia it is file storage. The token value draws speculators and investors towards the protocol and leads them to adopt it for their applications. This, in turn, increases the value, forming a loop of value addition and adoption.

Examples of Crypto Protocols

Blockchains are evolving fast. Within a decade of its public launch as only a digital currency, blockchain technology expanded from disrupting the finance sector into health, supply chain management, entertainment, logistics, and many more sectors. Here’s a cryptocurrency protocol list of the most popular ones:

1. Bitcoin

Bitcoin focuses on making error-free irreversible money transactions by eliminating the possibility of fraud and double spending. The peer-to-peer money transfer system uses digital signatures, public-key cryptography, proof-of-work, and hashing technologies.

2. Ethereum

It introduced the concept of smart contracts to trigger irreversible digital money movement when certain conditions are met. This conditional automation allowed it to be the foundation of decentralised applications that could do more than just transactions. It uses the same technologies as Bitcoin except that it uses proof-of-stake for consensus.

3. Ripple

The focus of Ripple is to facilitate seamless transactions of fiat and cryptos across the globe, including centralised conventional banks, financial institutions, and payment providers. It supports the seamless transfer of all kinds of digital assets. The transactions get verified within seconds with the help of consensus.

4. Hyperledger

Hyperledger was introduced by the Linux Foundation as an open-source framework with the goal of providing a universal set of guidelines for blockchain implementation in enterprise solutions. It supports Python (programming language) to enable the secure sharing of sensitive information. It has facilitated intellectual property management for businesses through the famous Hyperledger Fabric.

5. Multichain

Multichain is a cross-chain router protocol that allows businesses to create private blockchain networks. It provides APIs (application programming interfaces) and command line interfaces to facilitate the development of access-controlled blockchains. The creators can customise token generation, transaction, and validation rules for the private chain.

6. Openchain

Openchain provides a platform for organisations to issue and manage digital assets in a secure, robust, and scalable manner. It facilitates Partitioned Consensus in which a set of closed-loop users permitted by the administrator enjoy more rights than anonymous participants. It also enables businesses to have a hierarchical system with multiple instances of the chain.

7. Quorum

Quorum is an open-source subsidiary of Ethereum. This protocol focuses on leveraging the Ethereum blockchain for high-value business applications. It was developed to provide the ultimate enterprise blockchain framework for financial corporations to adopt blockchain. It can solve any financial query and provide an improved performance and transaction experience.

8. Corda

Corda is a stable and scalable protocol that does not have a native cryptocurrency. It is managed by the R3 banking consortium and is used mostly by regulated financial institutions to build an interconnected system of private blockchain networks while ensuring security and transparency.

9. Symbiont Distributed Ledger (SDL)

SDL is a platform for running decentralised applications while ensuring the security, and integrity of transactions for complex financial instruments. It boasts of its capability to process 80,000 transactions per second to speed up financial services. It works to reduce risk and improve operational efficiency and confidentiality on private blockchains.

Why is a Blockchain Protocol Important to Crypto?

Blockchain protocols form the backbone of cryptocurrency transactions, allowing them to remain decentralised by keeping their verification and validation consensus based. Additionally, the protocol enables trustless crypto transfers, which means they are free of intermediaries.

Conclusion

Behind every cryptocurrency, there is a network protocol that imparts value to it. It is essential to evaluate the intrinsic value carried by a crypto coin before investing in it, and its protocol is an important part of that. It is important for fundamental analysis which involves an evaluation of the technology, business model, and growth potential of the crypto.

FAQ

  • What is an Ethereum protocol?
    An Ethereum protocol is a set of rules to complete a predetermined transaction when some conditions are met. It provides event-triggered executable instructions in form of smart contracts.
  • What is the GET Protocol (GET) crypto?
    The crypto coin GET is the token of the GET blockchain. Its protocol is developed to provide a digital ticketing infrastructure using NFTs to avoid fraud and eliminate ticket scalping at scale.
  • What is the Unifi Protocol DAO (UNFI) crypto?
    The UNFI coin is the governance token of the DeFi approach designed around decentralised autonomous organisations (DAOs). It can facilitate the discovery of arbitrage opportunities with exclusive price discovery among chains.
  • What is the KLAYswap Protocol (KSP) crypto?
    KSP is the cryptocurrency of the KLAYswap Protocol, which enables complete on-chain token swapping with an on-chain liquidity pool. The liquidity is guaranteed by the automated market-making (AMM) technique.
  • What is blockchain protocol?
    A blockchain protocol is a set of rules that govern all the operations on the blockchain. These rules define how data is shared, secured, and validated on the network through a consensus.
  • Is the SeeSaw Protocol (SSW) crypto a scam?
    Most businesses invest in a protocol to build their business use case around it. The SeeSaw protocol aims at solving the problem of interoperability among existing and upcoming blockchains. It has gained attention and raised millions of dollars in the pre-sale for its widely needed attempt to facilitate multi-chain DeFi products, protocols, and use cases. However, an investor must thoroughly understand the business model, management team, and prospects before investing in any coin.
  • What is Bella Crypto?
    Bel is the token of a decentralised finance project that uses the Bella Protocol to make crypto banking seamless, accessible, and intuitive.
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About Niki Nikolaou
With 25+ years of financial marketing experience, Niki has an extensive knowledge of the forex, fintech, stocks and cryptocurrency sectors. Niki is a founder and director at the Contentworks agency.
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