A protocol is just a set of low-level instructions that must be completed by a machine. In computer science in general, it’s used for communication between devices or programs, such as Internet Protocol (IP) which lays the foundation of the modern Internet.
Blockchain technology also relies on a specific type of protocol that defines how data is synchronized between its nodes. There are different realizations of the technology to address a variety of problems, from facilitating financial transactions to managing real-world infrastructure.
Let’s look closer, starting by exploring digital protocols in general.
What is a digital protocol?
Everything in the information technology industry operates based on protocols, which are sets of instructions governing how the information is processed. Operating systems, data transmission devices such as USB, and the Internet are examples of protocols that are used every day. As one will see, blockchains are protocols, too.
The distinctive feature of any protocol is that one doesn’t need to know its internal structure to use it, as it’s already encoded to perform its function. We surf the Internet or pay with Bitcoins without knowing about the rules that govern them. However, knowing their internal structure is needed if one wants to work with them on deeper levels.
Now, we can focus on what is a protocol in crypto.
Blockchain protocols and their types
Blockchain technology is based on a set of rules and procedures that govern how data is recorded, validated, and shared among participants, which are called nodes. Therefore, every blockchain is inherently a protocol. One can identify key components of any blockchain protocol.
- It defines the structure of the blockchain.
- It sets the consensus mechanism for keeping this structure.
- It contains the methods for securing and verifying transactions.
The data structure of the blockchain includes organizing information into blocks that are linked together and encrypted in some way. Then, the protocol defines the consensus mechanism, such as Proof-of-Work or Proof-of-Stake. It determines how new blocks are added to the chain and how network participants agree on the validity of transactions.
Additionally, blockchain protocols specify the cryptographic algorithms used for securing data and verifying ownership. It also includes the rules for creating and managing digital assets or tokens within the network. One can see the overall scheme below.
All of that can be realized in different ways. Some protocols prioritize decentralization and security at the cost of transaction speed. Others focus on scalability and transaction efficiency. As the technology evolves, new protocols are emerging to offer unique features and address specific use cases or overcome limitations of earlier designs.
Let’s look at specific applications of blockchain protocols.
Applications of blockchain protocols
While mostly used for money transactions and fintech applications, blockchain protocols have great potential for different areas of human life. They protect and organize data, making them accessible and easier to manage. Everyone can access the public blockchain and participate in it in different ways. One can see several application examples below.
Source: Cryptocurrency Scripts
Focusing on all of them is beyond the scope of this article, so let’s explore the most popular examples and cases.
Consensus mechanisms
It’s the core of any blockchain. The consensus mechanism is a set of rules that define how the blockchain works, how new blocks form, and which transactions are allowed. The two most popular examples are Proof-of-Work (PoW) and Proof-of-Stake (PoS). The former requires performing computations to prove the network integrity, while the latter is based on staking some amount of the network’s tokens in the shared pool for a similar purpose. Less used mechanisms include Proof-of-Authority, Proof-of-Burn, and several others.
Due to the consensus mechanism, data can be added to the blockchain only according to a specific procedure and cannot be changed in the aftermath. Therefore, blockchain is highly secure and cannot be counterfeited without capturing the majority of its nodes.
NB: Read more about consensus mechanisms in our short guide.
Smart contracts
Blockchain protocols can be further divided into programmable and non-programmable ones. Ethereum and Bitcoin are the most prominent examples of the former and the latter, respectively. What’s the difference?
Programmable blockchains allow smart contracts: a set of instructions that are executed after a specific event is triggered. Therefore, they allow the creation of programs that are managed by those owning the blockchain’s specific token. It opens a variety of applications, from decentralized governance to ownership and identity management.
That’s what is NEAR Protocol, Ethereum, Solana, TON, and other programmable blockchains in crypto.
NB: Explore smart contracts in-depth in our specialized guide.
Decentralized finance (DeFi) and cross-chain bridges
The usage of smart contracts can be further expanded in protocols that automate financial operations, such as borrowing, lending, exchange, and staking. Their primary focuses are composability and smart governance, which means they form an ecosystem, uniting holders of various tokens on different chains.
All of them can invest their money to earn a stable interest income or lend them to other users with some collateral, having the chance to earn more. It’s important to understand how DeFi works before participating in it, as lending crypto is inherently risky. Popular examples of such protocols are Aave on EVM chains and Solend on Solana.
Other protocols focus on facilitating transactions between different blockchains, so they’re called bridge protocols. This means that transaction fees will be lower, so people can trade their assets at low commissions. An example is Wormhole, an interoperability protocol that connects Solana and Ethereum.
NB: Explore more types of DeFis in our specialized article.
Decentralized physical infrastructure networks (DePIN)
Some crypto protocols go even further and connect blockchain structures with real-world infrastructures, physical or informational. Examples include energy distribution, file transfer, network operation, and computing power management. Nowadays, they are managed by centralized providers, but community governance may be much more accessible and democratic.
A blockchain protocol can be designed, where owning a token grants the owner the opportunity to use the energy from the grid or connect to the Internet or mobile network. Consequently, tokens can be usually earned when contributing one’s own resources to the shared network. It enables one to earn by contributing resources like network bandwidth, disk space, or computing power.
NB: Read more about DePIN technology application examples in our longread.
The value of crypto protocols
Now one can see what is a crypto protocol, and that they have a lot of advantages. Their largest benefit is that they return power to the community, enabling people to decide without the need for intermediaries. It reduces costs and increases community participation while protecting their rights and ownership.
For example, in decentralized blockchain-based games, players own all their game assets and can trade them freely. In ordinary games, the sole owner is the game provider company, which often neglects players’ rights. Similar situations are with DeFis, DePINs, and other applications.
The largest value here is that people become true owners of their assets and can manage them using a system that is almost impossible to counterfeit.
Choosing the right protocol for your applications
Different blockchain protocols can be applied to solve different problems. Look at the scheme below to summarize how different protocols work and understand which ones may be the best suited.
Source: Cryptocurrency Scripts
There are three most important aspects of the blockchain protocol, which are hard to cover at once, which is known as the blockchain trilemma.
- Decentralization
- Security
- Scalability
Therefore, each protocol usually focuses on specific applications while being less suited for others. Bitcoin, for example, is very simple and highly secure but has low scalability and is energy-inefficient due to its PoW consensus. Specialized DeFi protocols are designed for interoperability and governance but are less secure. Choosing the right protocol is crucial when applying blockchain technology.
As it continues to develop, new solutions have the opportunity to cover all three aspects. Web3 developers constantly create new dApps, protocols, and other tools to meet community needs. GetBlock supports them in these endeavors by providing blockchain nodes for 50+ chains. Sign up now, and scale your plan as your Web3 apps grow!
