What Is a Protocol?
A protocol refers to rules that facilitate data sharing between computers.
In cryptocurrencies, protocols serve as the underlying structure for blockchain networks.
For instance, Satoshi Nakamoto created the Bitcoin protocol, which enables peer-to-peer transactions without intermediaries.
The blockchain, functioning as a distributed ledger, records these transactions and is secured through the collective computational power of the network.
What Are the Main Crypto Protocols?
Crypto protocols form the foundation of various cryptocurrency innovations.
They enable the decentralization of services without the involvement of a central authority overseeing the protocol.
Revolutionizing Decentralization
The Ethereum blockchain, on the other hand, birthed smart contracts, which are deterministic functions used as building blocks for creating more complex systems.
Smart contracts allow Ethereum to replicate the services of traditional financial institutions purely through code.
This development led to the rise of decentralized finance (DeFi) on the Ethereum protocol.
Other protocols cater to use cases, such as token swaps, staking, margin trading, lending, liquidity provision, and more.
How Do Crypto Protocols Generate Revenue?
Crypto protocols typically offer decentralized alternatives to centralized services through the utilization of smart contracts.
Notable revenue-generating use cases of crypto protocols include:
- Decentralized exchanges
- Insurance funds
- Yield farming
- Options
- Bridges
Crypto protocols generate revenue by charging fees based on their services, often a tiny fraction of the transaction volume.
These protocols are primarily operated by a small team and rely heavily on automated code implemented through smart contracts.