Protocol is becoming a hot new keyword in the blockchain industry. But what exactly is a protocol? Merriam-Webster dictionary defines the word protocol in the following way:
a set of conventions governing the treatment and especially the formatting of data in a communications system
You use protocols every day without even noticing. For example, a handshake is a protocol that is frequently used between two people when they meet.
A protocol without a usecase has no value. For example, European royal courts have had multiple protocols that defined the proper way to address the kings and prescribed how to behave in their presence. These days such protocols are no longer used as they have been replaced by more modern ones.
Apps are the products that consumers interact with and they typically use various protocols under the hood in order to communicate with other systems. Users of an app provide value to both the app itself as well as to the protocols that the app uses.
The key difference between apps and protocols is that protocols are composable. You can combine various protocols in order to create new functionality. For example, you can use the same handshake protocol in order to make a deal in person (hence people say let's shake hands on this deal).
Apps, on the other hand, exist in isolation. It is impossible to stack twitter and instagram to have an app that shows you one news feed for both apps.
Let's take a look at some of the modern protocols and apps and how they might be combined.
- Ethereum is a protocol for settling financial transactions.
- ERC20 and ERC223 are standard protocols that tokens must expose if they wish to be used by wallets (which are apps), exchanges, etc.
- Maker is a protocol that allows a party to collateralize their ETH and take out DAI, which is an ERC20 token.
- Saturn Protocol defines rules of token exchange among various parties, and it combines the Ethereum, ERC20 and ERC223 protocols in order to achieve this goal.
- Saturn Network and Saturn Tools are Apps that let users conveniently interact with Saturn Protocol.
Stacking more and more complex protocols lets our society save time and effort in order to build out more apps that solve people's problems. For example, Veil is a startup that uses 0x protocol and Augur protocol in order to provide a convenient betting-with-crypto experience. Veil benefits from these protocols as they provide their users with liquidity and safety, and the protocols benefit from having more users.
In 2017, there have been a lot of ICOs that promised to create a blockchain app store. These founders are completely missing the point: we do not need any more app stores, we need protocol stores. The Ethereum itself is a protocol that acts as a protocol store, and entrepreneurs are free to make apps that combine these protocols in a creative way. In fact, every smart contract is a protocol, as it clearly prescribes how to interact with it and is publicly available thanks to the underlying blockchain.
Each year we see more useful protocols emerge: Augur (betting), Saturn (value exchange), Maker (loans & stablecoin), Aztec (privacy for ERC20 tokens). At some point quantity will turn into quality, as creative entrepreneurs will learn how to combine and stack these protocols in order to create amazing apps.