January 1, 2022 -

Understanding a Blockchain Protocol

Understanding a Blockchain Protocol

You probably know what a cryptocurrency is and why it’s of great value, at least some of the currencies. You also understand the connection between cryptocurrency and blockchain — you wouldn’t have the first one without the second component. But what is a blockchain protocol?

Blockchain operates thanks to various rules and procedures that are collectively named as a protocol. Thanks to blockchain protocols, the data can be shared between computers all around the world. Meaning, a blockchain protocol is an essential part of a blockchain, and we wouldn’t have cryptocurrencies without this set of rules.

But what exactly is a blockchain protocol and what does it do for the blockchain system? Study the article to learn more about the exciting world of blockchain protocols.

What is a Protocol?

If you forget about the world of cryptocurrency for just a second, you will remember that before 2008 they didn’t exist. But what existed before blockchain and the very first cryptocurrency, Bitcoin, is a computer. In the world of computers, a protocol is a range of rules or procedures that organize the transfer of data between two devices.

The set of rules of procedures explains how the data should be stored and then transferred. As a result, devices can send this data to each other according to a digital protocol. Without an overall protocol used by various devices, the data may have been sent, but it’s doubtful that it could be read.

You are already aware of some protocols and you observe their usage every day, for example, HTTPS, and it’s not secure predecessor HTTP. But what about the crypto world? What is a protocol in the world of blockchain?

Understanding a Blockchain Protocol

Protocols and the World of Cryptocurrency

As you probably have figured out by now, in the world of blockchain a protocol is a set of rules that explain how the blockchain system has to work. The blockchain protocol shows how the interface should be seen, how computers within the networks have to operate and interact, how the transactions should be made, etc.

Overall, blockchain protocols give an idea of sharing data, and how all components sharing and storing data should operate. A blockchain overall is a network that consists of various computer devices.

Each device within the system is a node, all nodes are equal and are used to verify and confirm transactions within the ecosystem. These transactions are stored on a blockchain, usually called a distributed ledger.

The ledger operates on a set of rules that is called a blockchain protocol. In simple words, without a blockchain protocol, nodes wouldn’t be able to communicate with each other. Meaning, the verification process wouldn’t be possible, and cryptocurrency wouldn’t have existed.

How do Blockchain Protocols Operate?

A protocol can’t be efficient if all the participants within the blockchain don’t follow its rules. Everyone participating in the process should follow all the protocol layers. Most blockchain protocols are categorized due to layers. These are as follows:

  • The foundation of the blockchain protocol. It involves either Proof of Work or Proof of Stake protocols. The first one operates thanks to computers (nodes) validating operations, the second is based on stakeholders validating operations.
  • The second layer is based on the foundation and solves such issues as scalability and speed of validation processes. For example, there is Bitcoin, the main blockchain, but there is also Lightning Network, a chain built on top of Bitcoin. Its main goal is to release the pressure from the main system that is highly clogged by millions of transactions awaiting confirmation.
  • The last layer is all about operating the application. It is possible to use only several layers of a blockchain protocol, but most popular blockchains use all three. For example, the NFT marketplace, some most popular DeFi (decentralized finance) exchange platforms, etc.

It is common for developers to participate in the development of new blockchains by using pre-existing open source protocols. But some developers create new protocols, some of them have even more than three layers, usually, up to five.

The Significance of a Blockchain Protocol

It is clear that without blockchain protocols, the blockchain system wouldn’t be able to exchange info, therefore, it wouldn’t be able to exist. But why else is it so important to the blockchain and cryptocurrency? Here are some key facts:

  • Blockchain protocols aim at creating a system of how to verify transactions. Without a clear scheme of how to validate a transaction, it would be possible to double-spend crypto tokens.
  • Without the protocol that set rules, it simply wouldn’t have been possible to exchange crypto and conduct financial transactions.
  • All existing protocols enforce a certain structure. Whether it’s a two-, three-, or even a five-layer protocol, it brings a clear structure followed by millions of participants all over the world.
  • Protocols enforce validation rules. All blockchain participants are able to follow a clear scheme of adding blocks and therefore validate transactions.

In simple words, if there is no protocol, there is no blockchain.

The Most Popular Blockchain Protocols

Even though developers can use pre-existing protocols available publicly, some decide to create new and better protocols. But there are several main blockchain protocols adopted by developers. Here are some of them:

  • Bitcoin protocol. It’s the very first blockchain protocol that the world has seen. Bitcoin protocols have helped create a set of rules on how to conduct financial transactions. For example, peer-to-peer transactions, consensus algorithms, the enforcement of digital signatures for business and other purposes, hash protocol (one of the safest protocols), and other similar sets of rules have been created based on Bitcoin protocol.
  • Ethereum protocol. Ethereum has a different purpose than Bitcoin, although both systems offer the same principle of decentralized operation. Ethereum protocol is centered around smart contracts that enable transactions as long as participants meet certain sets of requirements.
  • Cardano protocol. The Cardano blockchain is built on top of Ethereum, and it uses the Ouroboros protocol. Its main idea is to fix one of the most serious problems of all blockchain systems — the increased power consumption necessary for validating transactions within blockchain networks.
  • Hyperledger protocol. It emerged thanks to the need for enterprises to have a safe and decentralized platform for financial transactions.

Other honorable mentions are Corda, Quorum, Multichain, etc. As it was mentioned, most other blockchain systems use already existing protocols. These blockchains have their currencies, which are often called altcoins. An altcoin is a fork, meaning, it operates on a copy of another blockchain’s protocol.

The Bottom Line

Overall, a blockchain protocol is just a set of rules that enforce how blockchains should work. The increased usage of blockchains and the popularity of cryptocurrencies means that eventually, blockchain protocols are to become more advanced. There are quite a few issues to be fixed within the blockchain world, and perhaps, in the future, new protocols will aim to offer solutions.