What Is a Blockchain Protocol and Why Is It Important for Crypto? – MakeUseOf

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Blockchain protocols are critical for the functioning of all cryptocurrencies. But what are they, and how do they work?

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Cryptocurrency runs on the blockchain, and blockchain technology comprises many computational rules or procedures—some of which you may have heard of as buzzwords in the media.

Collectively, these rules are referred to as protocols. However, they are more than commands on a computer. So, here’s what a blockchain protocol really is.

What Is a Blockchain Protocol?

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Image Credit: BeatingBetting.co.uk/Flickr

In the world of computer programming, protocols are standardized rules that dictate what a system should or should not do. Therefore, in the world of blockchain, blockchain protocols are a set of codes or demands that govern how a blockchain should operate.

A blockchain protocol can lay down a wide set of rules, such as the blockchain’s interface, the interaction of participating computers, the kind of data that should be shared, incentives for developers that participate in the network, and so on.

How Does a Blockchain Protocol Work?

A blockchain protocol can only work if everyone involved in the protocol follows it and works on its layers step-by-step.

Current blockchain protocols can be categorized into three layers:

  • Layer 1: This layer refers to the fundamental system of a blockchain protocol. Examples of layer one protocols include the famous Proof of Work (PoW) and Proof of Stake (PoS) systems.
  • Layer 2: This layer builds on Layer 1 and mainly solves speed and scalability issues. An example of a layer two protocol is Bitcoin’s Lightning Network, which is designed to process Bitcoin transactions quickly.
  • Layer 3: This layer deals with the application and execution of a blockchain protocol. Many decentralized applications are layer three protocols. Examples include decentralized finance (DeFi) platforms Uniswap, PancakeSwap, and NFT marketplace NBA Top Shot.

Due to the exploding popularity of cryptocurrencies, many blockchain companies are now building on existing protocol layers to address existing issues in their systems. Some blockchain protocols now offer up to five protocol layers for maximum scalability.

Why Is a Blockchain Protocol Important to Crypto?

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Blockchain protocols make cryptocurrency transactions possible. All protocols in the industry aim to achieve or maintain the four main principles of cryptocurrency: decentralization, consistency, security, and scalability.

The existence of a blockchain protocol also provides structure to a blockchain network. A blockchain network consists of individuals and organizations that run them, and protocols are put in place to ensure that every single transaction is verified by developers and engineers and therefore runs smoothly.

Simply put, without blockchain protocols, cryptocurrencies wouldn’t be where they are today.

What Are the Main Types of Blockchain Protocols?

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There are hundreds of blockchain protocols in existence, and each offers a different function depending on the company that runs them.

Here are the main types of blockchain protocols in the cryptocurrency world:

  • Bitcoin: Bitcoin’s transaction protocol is the landmark blockchain protocol that revolutionized digital payments. A few of its protocols laid the foundation for cryptocurrency transactions: peer-to-peer transactions, hashes, digital signatures, and so on.
  • Ethereum: Ethereum’s protocol is based on smart contracts, where transactions are automatically performed when established criteria on the network are met.
  • Cardano: Emerging cryptocurrency Cardano runs on a protocol known as Ouroboros, which is designed to reduce energy consumption in cryptocurrency transactions.
  • Hyperledger: Hyperledger is targeted at businesses from different sectors and aims to empower business transactions and other financial services.

In the cryptocurrency market, many altcoins are forks of Bitcoin and Ethereum. A cryptocurrency fork is basically a “copy” of another cryptocurrency’s protocol.

Blockchain Protocols Define Cryptocurrencies

Blockchain protocols serve as the backbone of cryptocurrencies, and the swift development of blockchain technology as a whole means that new protocols are often being introduced to the market.

Considering that cryptocurrencies are here to stay, it is just a matter of time that blockchain protocols become more advanced and eventually change the landscape of digital currency.

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About The Author

Jie Yee Ong (48 Articles Published)

Currently based in Melbourne, Australia, Jie Yee has experience in writing about the Australian real estate market and the Southeast Asian tech scene, as well as conducting business intelligence research in the wider Asia-Pacific region.

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