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Published August 30, 2022

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As you learn more about blockchain technology, you’ll undoubtedly come across the term ‘cryptocurrency protocol’ while exploring different projects, currencies and platforms. So, what exactly is a cryptocurrency protocol? In this article, we’ll explore what protocols are in the context of blockchain and cryptocurrencies, how they work, and some popular protocols you probably interact with every day.  

It Starts at the Computer 

As computer science has progressed, we’ve seen the development of different protocols to streamline communication and collaboration between computers. A protocol can be thought of as a set of rules that govern how information is exchanged between devices. Over time, different protocols have been developed to suit different purposes – from early email protocols like SMTP (Simple Mail Transfer Protocol), to more recent ones like HTTP (Hypertext Transfer Protocol) that power the modern internet. 

Types of Protocols 

fat protocols vs thin protocols

People interact with computer protocols every day, and if you’re reading this article online, you’re using a protocol to do so. When you open a web browser and type in a URL, you’re using the HTTP protocol to request data from a server. When you check your email, you’re using the POP3 (Post Office Protocol version 3) or IMAP (Internet Message Access Protocol) protocol to retrieve messages from a mail server. 

There are many different types of protocols, but they can generally be divided into two main categories: 

Thin Protocols

In computer networking, a thin protocol is a network protocol with very little overhead. In this context, overhead refers to the amount of data required to be exchanged in order for two devices to communicate. Thin protocols are designed to be as efficient as possible, using the minimum amount of data required to get the job done, and are typically used for real-time applications where speed and efficiency are critical, such as streaming video or audio. 

One example of a thin protocol is the Real Time Streaming Protocol (RTSP), which is used to stream multimedia data over a network. RTSP provides commands to control the delivery of data, such as pausing, fast-forwarding, and rewinding. 

Fat Protocols 

A fat protocol, in contrast, is a network protocol with a lot of overhead. Fat protocols are typically used for applications where data needs to be stored and retrieved, such as email or file sharing. 

One example of a fat protocol is the Simple Mail Transfer Protocol (SMTP), which is used to send email messages between servers. When you send an email, your computer creates a message using the SMTP protocol and sends it to a mail server. The mail server then forwards the message to the recipient’s mail server using the SMTP protocol. 

Protocols in Blockchain 

So what do protocols have to do with blockchain? In the context of blockchain, a protocol is a set of rules that govern how data is exchanged on the network. Just like other protocols, crypto protocols define how information is exchanged between computers on the network. 

However, what makes crypto protocols unique is that they also define how consensus is reached. Consensus is important in any decentralized system, because it allows all the computers on the network to agree on the state of the system and validate any future changes. 

For example, consider a blockchain protocol like Bitcoin. The Bitcoin protocol defines how transactions are verified and recorded on the blockchain. It also defines how consensus is reached – when a new block is added to the blockchain, all the computers on the network must agree that the block is valid. 

How Protocols Work

Proof of work vs proof of stake

Cryptocurrency protocols use something called a consensus mechanism to reach agreement on the state of the network. Consensus mechanisms are algorithms that allow computers on the network to agree on the order of transactions. 

The first and most common consensus mechanism is Proof of Work (PoW), which is used by blockchains like Bitcoin and Litecoin. Under the proof-of-work consensus mechanism, computers on the network compete to solve complex mathematical problems. The first computer to solve the problem gets to add the next block of transactions to the blockchain. 

Another popular consensus mechanism is Proof of Stake (PoS). Proof-of-stake protocols are used by blockchains like Cardano and Polkadot to reach consensus. Under the PoS consensus mechanism, computers on the network “stake” their coins to validate transactions. The more coins you stake, the more likely you are to be chosen to add the next block of transactions to the blockchain. If a node validates fraudulent transactions, it stands to lose its stake in the network as a penalty. 

Examples of Crypto Protocols

Every cryptocurrency in existence today is based off of some variation of a crypto protocol. Here are some examples of popular protocols: 

Bitcoin

Bitcoin is the cryptocurrency that pioneered the proof-of-work consensus mechanism. The Bitcoin protocol was first proposed by Satoshi Nakamoto in 2008, and went live in January of 2009. Bitcoin was the first live application of blockchain technology, and it established cryptocurrencies as a new class of digital assets and blockchain technology as a new class of computer protocol.  

Ethereum

The Ethereum protocol was first proposed by Vitalik Buterin in 2013 as an evolution of the Bitcoin protocol. The Ethereum protocol went live in July of 2015 with the launch of the Ethereum network, and introduced several new features to blockchain technology, like smart contracts, which fueled the rise of decentralized applications (dApps) and the decentralized finance space.

While Ethereum has evolved as a proof-of-work blockchain like Bitcoin, that is set to change in September with the Ethereum Merge, a highly anticipated upgrade that transitions Ethereum to a proof-of-stake blockchain. With this development, the network’s transaction speed and throughput could increase drastically. Check out our article on the Merge for more information! 

Cardano

Cardano is a cryptocurrency that uses the proof-of-stake consensus mechanism. The Cardano protocol was first proposed by Charles Hoskinson in 2015, and went live in September of 2017 with the launch of the Cardano network. Cardano is notable for being one of the first cryptocurrencies to take an academic approach to protocol development, and was built with increasing the blockchain’s speed and scalability in mind. 

Solana

Solana is a crypto protocol that uses a novel consensus mechanism called proof-of-history. The Solana protocol was first proposed by Anatoly Yakovenko in 2017, and went live in March of 2020 with the launch of the Solana network. Solana is notable for its high transaction speed; it can process upwards of 50,000 transactions per second, and is used by several high-profile decentralized applications.  

Polkadot

Polkadot is a cryptocurrency that uses the proof-of-stake consensus mechanism. The Polkadot protocol was first proposed by Gavin Wood in 2016, and went live in May of 2020. Polkadot is notable for its interoperability; it can connect different blockchain networks together, and also serves as a platform for dApp development. 

The Importance of Crypto Protocols

Crypto protocols lie at the heart of the cryptocurrency industry. Without protocols, there would be no blockchain technology, and therefore no cryptocurrencies as we know them today. Crypto protocols define how transactions are verified and recorded on the blockchain. They also establish rules for consensus and governance, and provide a platform for developers to build decentralized applications. 

These digital rules and guidelines are the foundation of the cryptocurrency industry, and as the industry continues to grow, the industry’s various protocols and their unique features will become even more important. 

If you’re interested in learning more about crypto protocols, be sure to check out our other posts, where we take an in-depth look at the various projects that are shaping the industry, and follow FTT DAO on Twitter to stay up to date with the latest news and analysis from across the industry.  

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