Cryptocurrency Protocols: What Big Banks Don’t Want You to Know

Illustration of decentralized blockchain

Cryptocurrency protocols are a massive part of how blockchains work and are what make cryptocurrencies possible. Without them, none of these systems would function at all. However, many people are unaware that protocols even exist, and even fewer people understand what they are and why they are important. 

So, what is a protocol? How does it impact the function of a blockchain or a cryptocurrency? Keep reading to find out!

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What Is a Protocol?

Protocols are essentially the rules that allow computers to work together. They govern the way systems are interpreted by the computers themselves. 

For example, you are probably familiar with HTTP and HTTPS, as they appear in the address bar of every website you visit. These are types of protocols, as HTTP stands for hypertext transfer protocol. These protocols form the basis for how your computer browser understands and then displays a web page. If a website tried to use a different protocol, your computer wouldn’t be able to understand it, and thus, it would not work. 

All protocols are based on the understanding that a shared set of rules are necessary to get anything done. If everyone uses a different ruleset, the entire system fails to work properly. 

In the world of cryptocurrency, protocols create the blockchain’s structure. A protocol forms the set of rules upon which that particular blockchain operates. These will vary depending on the blockchain, and because of this, many different blockchain protocols exist. 

Why Are Protocols Important? 

Protocols are important because, without them, the blockchain wouldn’t exist. The rules behind a blockchain are necessary to govern it and all the computers that are interacting with it. Without a set of rules, everything the blockchain accomplishes would be impossible. 

Think of it like a game of baseball. If you know the rules of the game, you can jump into a baseball game without worry. You don’t even have to know a single player on the field as long as you all agree on the rules and accept that you are going to join the game. As long as you all stick to the rules you have agreed upon, the game will run smoothly, and everyone will have a good time. 

Things function similarly with crypto. Protocols determine the status of the blockchain. They ensure that money in one wallet actually belongs there and hasn’t been spent by another wallet. They also govern how mining works

One of the biggest and most important things protocols do is allow for the decentralized nature of many blockchains. Since each computer interacting with the blockchain operates on the same fundamental rules, there is no need for a central computer to run things. Instead, each computer does that on its own. 

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Again, think of it like baseball. If the people playing a game of baseball are as honest and accurate as computers are, there is no need for an umpire. Everyone will simply stick to the rules, and the game will run smoothly. In this way, there is no official umpire, but every player acts as the umpire for their own actions. 

This is why big banks and even some countries don’t like cryptocurrency protocols. These banks want to be the intermediary facilitating all transactions. They want to be the umpire. By taking away the importance of this role, decentralized cryptocurrencies take power away from big banks. 

Person looking at finance data on a computer

What Do Different Protocols Accomplish? 

Now that you understand what protocols are, you may wonder why there are different protocols. After all, it seems like having everyone agree on a basic set of rules would work out for the best. However, in the real world, this isn’t the case. 

Different protocols exist because not everyone wants the same thing out of a cryptocurrency. Some people want to use cryptocurrency as a replacement for fiat currency and appreciate the benefits it provides in this regard. Others want to use cryptocurrency as a form of investment and purchase different types of crypto to diversify their portfolio. Others want to use cryptocurrency as a way to accomplish other goals, like using it as a way to verify smart contracts. Ultimately, crypto has a lot of potential; different people want to use this potential in different ways. 

To do this, different protocols are created. These protocols allow different blockchains to function in different ways. Each chain has advantages and disadvantages that set it apart from the others. What chain works best for you depends on exactly what you want from it. 

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Types of Protocols

There are as many types of cryptocurrency protocols as there are blockchains. This is because each blockchain needs a protocol to function. So, each blockchain uses its own protocol. 

The most well-known protocol is the protocol used by Bitcoin. This cryptocurrency is so popular it is now a household name. Its protocol focuses on allowing peer-to-peer transactions that don’t require a third party. However, it also allows non-reversible transactions and offers things like proof-of-work mining. 

The second most popular protocol is used by Ethereum. This cryptocurrency has been a Bitcoin competitor for a long time and offers a few different things. However, the protocol powering Ethereum gives it the power to facilitate smart contracts. This is why Ethereum is often used for things like NFTs. 

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Another protocol goes into powering Ripple. This protocol is focused on allowing coins to function like real currency. Coins from this protocol are easy to exchange and easy to send from wallet to wallet. It is also easy for crypto from this protocol to be converted into other cryptocurrencies, fiat currencies, or even things like frequent flier miles. 

While these are a few popular types of protocols, there are far more than these options. Now that you understand protocols, you have the knowledge to research them for yourself and find out what makes each one unique. 

3D illustration of crypto coins on a gray background

Understanding Cryptocurrency Protocols

Cryptocurrency protocols are incredibly important to the very basic function of cryptocurrencies. They govern how cryptocurrencies work and play a big part in how people use crypto as a whole. This is why knowing about and understanding “what is a protocol” is necessary for anyone seriously interested in crypto. 

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