Protocol
What Is a Protocol?
A protocol is a set of rules allowing data to be shared between computers. Cryptocurrency protocols define a structure that is the foundation of blockchain networks. For example, the Bitcoin blockchain is a protocol created by Satoshi Nakamoto that allows sending payments in a P2P manner without intermediaries. The blockchain works as a distributed ledger that records transactions and is secured by the combined computing power of the network.
What Are the Main Crypto Protocols?
Crypto protocols are the foundation of the innovation that are cryptocurrencies. They enable the decentralization function of several services without a central authority coordinating the protocol's functionality. For example, the Bitcoin protocol was the first to create digital peer-to-peer payments that are verifiably backed by computing power. This is the proof-of-work consensus mechanism that solved the double-spend problem.
The Ethereum blockchain is a protocol that gave birth to smart contracts, which are deterministic functions that work as building blocks to create more complex systems. For instance, smart contracts allow Ethereum to replicate the services of financial institutions purely with code. This service is known as decentralized finance (DeFi) and was possible due to the rise of the Ethereum protocol.
Other protocols that have since been created offer different use cases, like token swaps, staking, margin trading, lending, providing liquidity and other functions.
How Do Crypto Protocols Make Money?
Crypto protocols usually provide a service that replaces a centralized service with a decentralized version running purely based on smart contracts. For example, important crypto protocol use cases are:
Decentralized exchange
Insurance funds
Yield farming
Options
Bridges
A crypto protocol charges a fee based on the service it provides, which is usually a tiny fraction of the transaction volume. It has only a few team members operating it and is, for the most part, automated code in smart contracts.
