Brought to you by the Liquid team to help you make sense of crypto.
Even if you're new to crypto, you’ve likely come across the term “protocol”.
What are protocols and why are they important? Is “fat protocol theory” really a thing?
As the cryptocurrency ecosystem has expanded to include more assets and exchanges, protocols have taken on more prominence and relevance.
In this article, we will look at how protocols fit into the blockchain story, covering:
- What are protocols?
- Thin protocols and fat protocols
- Examples of crypto protocols
So what are protocols?
Not all blockchains are the same. The way they work is determined by a protocol.
A protocol is basically a foundational layer of code that tells something how to function. It's the program that forms the software basis of any given network. Think of a protocol as a set of rules that allow entities to communicate and transmit information.
Protocols are not specific to cryptocurrency. They exist in many places.
On the Internet, protocols enable websites to function. The most common internet protocols are HTTP and HTTPS – though you might also see TCP/IP and SMTP.
Those protocols are the underlying code that allows all Internet applications to run. Facebook, Amazon, Twitter, Google, Netflix, banking websites, news websites – nearly every website you use runs on one of these internet protocols.
Cryptocurrency protocols only allow the functioning of a few applications – sometimes only the application of the cryptocurrency itself. Protocols provide the security for and access to a blockchain.
Historically, we had to trust a bank to maintain the accuracy of our bank account and ensure that our money is not “double spent”. This is the centralized model of traditional financial management.
But in the decentralized world of the blockchain, security is provided by the protocol, which allows for communication of data.
As the digital world has grown, we have allowed more and more organizations to hold and access our data. We have multiple paying accounts across many websites.
Having personal data in so many places makes it hard to maintain the accuracy of our data (“What’s my email password?”) and makes our data vulnerable in the instance of a hack.
Cryptocurrency protocols allow users to manage their data. They allow individuals to create an account – or a wallet – on a protocol that can then be used to pay for services and make financial transactions on other websites.
The security and unique identity of these applications is, at its foundational level, in the protocol. The protocol powers the applications above it while also providing security.
Why is this cool?
It means you own your unique data and have more powerful and secure access to a variety of goods and services.
What are thin protocols and fat protocols?
The key difference between cryptocurrency protocols and internet protocols is that the former usually allows one to a few applications to function while the latter provides many applications to run.
This is why cryptocurrency protocols are called fat: they have very few applications running on them. Internet protocols are thin: they have thousands and thousands – even millions – of applications running on them.
With any cryptocurrency, the protocol is the value. It’s what powers the blockchain and enables the cryptocurrency to do what it's meant to do.
Examples of crypto protocols
Bitcoin is the most well-known cryptocurrency protocol. It is a peer-to-peer cash system that enables individuals to make financial transactions with each other without any trusted third party (a bank.)
The protocol allows non-reversible transactions, and it prevents any double-spending. Technologies that make Bitcoin what it is include hash, digital signature, public-key cryptography, P2P and Proof-of-Work mining.
Ethereum is different from Bitcoin in that its primary service is through smart contracts, applications that run with little interference from third parties and store registries of debts and markets while also enabling moving funds.
Ripple – whose native currency is XRP – is a platform that launched in 2012. Its primary function is to allow banks, payment providers and digital asset exchanges to send money globally.
It uses an open-source distributed consensus ledger and supports tokens that can be in the form of a variety of currencies, including fiat, other cryptocurrencies or other assets – like frequent-flier miles.
Hyperledger unifies leaders from a variety of industries – including financing, manufacturing, technology, and IoT – and enables support of international business transactions, supply chain business, and technology services.
Hyperledger was started in 2015 by the Linux Foundation, supports Python and provides a secure channel on which individuals can share private information.
Openchain provides a platform for organizations to issue and manage digital assets – like a start-up selling security tokens or equity tokens. Unlike other protocols, it enables Partitioned Consensus, which allows individuals to create unique instances that will have a single authority.
Corda does not have a native cryptocurrency, and is primarily used by regulated financial institutions to record, oversee and align their financial agreements. It is an open-source protocol, and avoids converting blockchain into scenarios that do not align with banking scenarios.
Symbiont Distributed Ledger
Symbiont Distributed Ledger can process 80,000 transactions per second and is targeted at institutions that need to allow complex financial instruments. It was introduced in 2016 as a development kit for Assembly, the permitted distributed ledger of Symbiont’s smart contracts system.
These protocols above and others exist to power the assets you see in the cryptocurrency marketplace.
This content is not financial advice and should not form the basis of any financial investment decisions nor be seen as a recommendation to buy or sell any good or product. Trading cryptocurrency is complex and comes with a high risk of losing money, particularly if you trade on leverage. You should carefully consider whether trading cryptocurrencies is right for you and take the time to learn how trading works and decide how much money you are prepared to lose.
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