The set of rules that define interactions on a network, usually involving consensus, transaction validation, and network participation on a blockchain.
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.
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
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
, margin trading, lending
, providing liquidity and other functions.
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:
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.