What Are Blockchain Protocols?
Blockchain protocols are critical components of a blockchain-based DLT that facilitate information sharing and dictate processes such as transaction validation, system security, the interaction of participating nodes, etc.
As you continue reading this, it’s useful to keep in mind the broader definition of protocols as rules that define the terms of engagement in the computing world.
See more: Layer of blockchain
Thin Protocols in Legacy Networks
Legacy networks have what we call “thin” protocols and “fat” applications. With TCP/IP, for example, the bulk of the generated value is captured in the application layer that is built on top of it. Most consumers, however, are unaware of the underlying protocol layer’s existence, despite its tremendous value. For instance, applications like Facebook, Twitter and Google amass several billions of dollars in revenue per year, whereas the developers of TCP/IP and HTTPS make barely a single cent from every application that runs on the network they designed.
Fat protocols refer to the reversed world of blockchain, in which the majority of value is concentrated at the shared protocol level. This makes the protocol fat, while only a tiny portion of the value is allocated at the application level, making it thin. Fat protocols in the blockchain space thus operate in marked contrast to legacy internet rules, which remain largely defined by the TCP/IP setup.
Why Crypto Has Fat Protocols and Thin Applications
Notably, the shared data layer simplifies the entry of new users and supports complex applications that run and execute commands. This spurs the creation of more products that create a vibrant ecosystem around the protocol layer, which, in turn, draws in new users.
Let’s demonstrate this with a short case study using Ethereum and its native cryptocurrency Ether (ETH). The feedback loop goes like this:
- ETH’s price rises, which entices developers, early speculators and investors.
- They all buy some ETH.
- ETH’s price surges and the early investors, speculators and developers make a profit.
- Being financially invested in the protocol, the same stakeholders support or directly contribute to building products and services for Ethereum, knowing that the value of their coins will appreciate the more successful the protocol becomes.
- Some of these products and services will succeed, drawing new users to Ethereum.
- The new users will become the new developers, early speculators and investors.
- Rinse, repeat.
Layer One Protocols
Ethereum proves that, in some cases, layer one may be preceded by a “layer zero,” which lays the groundwork for components to support a new layer above. As such, in the case of Bitcoin, layer zero comprises the hardware, internet, and other components meant to ensure the smooth operations of layer one.
The above examples illustrate how nuanced these conceptual layers can be. To reiterate, the blockchain space is still nascent and hasn’t yet been standardized.
Unfortunately, none of the existing protocols have yet to scale to the level that suits global usage without having to compromise other blockchain attributes like decentralization and security. This is why many developers are proposing the use of layer two solutions.
Layer 2 Protocols
Layer two protocols can handle transaction processing on behalf of the base network. In most cases, off-chain options are designed to solve the native platform’s scalability limitations and operational difficulties. Let’s take a look at some of the layer two solutions out there.
State channels are mechanisms used to allow users to directly conduct operations with each other on a layer outside a blockchain (off-chain). They only report the results to the blockchain when a channel closes. A great example of a layer two protocol that uses state channels is the Lightning Network.
Plasma is a scaling solution for the Ethereum blockchain. Unlike Bitcoin’s Lightning Network, Plasma takes a different approach, as it provides a generalized framework that supports the creation of other “child chains” powered by Ethereum.
Optimistic Rollup (OR)
Layer two scaling solutions prepare the ground for the proliferation of DApps by preventing the limitations of layer one protocols from being carried over to layer three platforms.
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In Ethereum’s case, the applications running on top of it are constantly exhausting its network capacity, causing bottlenecks. Layer two solutions are aimed to decongest the network in order to overcome high fees and slow confirmation times.
Layer 3 Protocols
Layer three blockchain protocols can be split into two major sub-layers — application and execution — depending on a given DApp’s use case.
On the other hand, the execution layer handles the rules and smart contracts. As such, it holds the actual application juice, which is the code. The intersection between the two layers appears during execution.
Let’s take a look at some of the layer three protocols, otherwise known as decentralized applications, which vary greatly and come in different forms.
NBA Top Shot
The above explanations detail the various layers of a decentralized network, providing a not too technical approach to understanding blockchain technology, especially how the different layers interact to bring out the best of a decentralized platform. Note that the lack or presence of one layer affects the overall appeal of a distributed network.
Layer one is crucial since it forms the base infrastructure to support decentralized systems. Layer two protocols mitigate the scalability shortcomings of the underlying blockchain. Unfortunately, most layer three protocols (DApps) are today running directly on layer one protocols, skipping layer two. It’s no surprise that these systems are not running as smoothly as we’d want them to.
Layer three applications ultimately create real-world use cases for blockchains, so they are definitely important. However, in contrast to legacy networks, they won’t capture nearly as much value as their base blockchain.
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