What are cryptocurrency protocols?

These agreements refer to mathematical formulas that record the common conditions, principles and functionalities for all participants.

What are the protocols?

Protocols are systems of rules that allow communication between computers to share information. With the arrival of Bitcoin and decentralized funding for the development of open protocols, entrepreneurs have been inspired to develop applications on this new base by creating new protocols to operate in a decentralized world.

Cryptocurrencies developed based on Blockchain have the main characteristic of this technology: trust and decentralization, this goes beyond whether the participants have full confidence or not. That is why it is necessary to reach agreements on how a process should operate, and in computing, these agreements refer to mathematical formulas that record the conditions, principles and common functionalities for all participants, called algorithms or consensus protocols.

The Bitcoin protocol

Bitcoin has Blockchain as its backbone and uses in its processes an open protocol to share content in a decentralized manner, designed to exchange peer-to-peer files on the Internet, in which a network of computers or machines known as nodes behave as equals to each other, acting at the same time as clients or servers in respect to the other nodes of the network, allowing the direct exchange of information in any format, between the interconnected devices. Bitcoin adds in its process a consensus algorithm called Proof of Work (PoW).

Consensus algorithms  

Proof of Work (PoW): the customer must perform some type of work that of a certain cost and that is easily verified by the server, which consists of making a mathematical operation on the client’s computer, in order to avoid unwanted behavior (attacks of denial of service or spam). For this system there are two kinds of protocols:     

Challenge-response: these take a direct interactive link between the client and the server. The server chooses a challenge in which the client finds an appropriate response in the set, which is sent back to the server where it is verified.

Solution-verification: these don’t take a link as in the previous case, therefore the challenge must be self-imposed before the client can find a solution, and the server must verify both the chosen challenge and the solution found.

Proof of Stake (PoS): it’s a distributed consensus protocol for distributed networks that ensures a cryptocurrency network, which works with the probability of finding a block of transactions and receiving the corresponding prize by requesting proofs of possession of cryptocurrencies. The difference with the PoW is that it is based on the assumption that those who own more units of a PoS-based currency are especially interested in the survival and proper functioning of the network that gives value to those currencies.

Within this protocol, other forms of participation test algorithms have emerged, such as:   

Pure participation test: it makes building blocks easier for those who can show control over a large number of coins. Its disadvantage is that the one that owns more cryptocurrencies always has more facility to build the Blockchain.

Deposit test: when coins are used by the block creators to create a block they are frozen until a certain number of blocks is confirmed. It doesn’t reward a miner for storing coins that haven’t been spent for a long time, but rather rewards miners who are willing to hold unmoving coins in the future.

Proof of authority (PoA): developed to solve the problem of spam attacks on Ethereum’s Ropsten test network, it’s a test network available to all Ethereum users. It has low computational power requirements, no communication requirement between nodes and the continuity of the network regardless of the number of genuine nodes available.

The emergence of new cryptocurrencies has allowed the development of alternative protocols, with specific characteristics for each product, some examples are:

Proof of activity: it’s a hybrid between PoW and PoS. Mining begins in a traditional way of working proof, with miners competing to solve a cryptographic enigma. Depending on the implementation, extracted blocks don’t contain any transactions, so the winning block only contains a header and the reward address of the miner. At this point the system changes to stake test with the information in the header, a random group of validators is chosen to sign the new block.

Proof of burn (PoB): instead of pouring money into expensive computer equipment, coins are “burned” by sending them to an address where they can not be recovered. By depositing the coins in the never-won land, a lifetime privilege to undermine the system based on a random selection process is earned. Miners can burn the native currency or the currency of an alternative chain, such as bitcoin. The more coins you burn, the more likely you are to be selected to exploit the next block. When your participation in the system declines you will want to burn more coins to increase your chances of selection, imitating the bitcoin mining process.

Proof of capacity (PoC): it employs a type of pay per reproduction scheme, but here it “pays” with hard disk space. The more space you have the more possibilities you will have to exploit the next block and get the reward. Before performing mining in a capacity test system, the algorithm generates large data sets known as ‘parcels’, which is stored on the hard disk. The more parcels you have, the more likely you are to find the next block in the chain.

Proof of Play (PoP): this alternative hasn’t been as successful as the previous ones. The initial project to use this protocol was Motocoin, and although there are other proposals created with Ethereum technology, they haven’t been strongly consolidated in the market, as the main problem is the vulnerability to potential hackers. The PoP proposal seeks the validation of blocks and the generation of cryptoactives by assigning challenges through a game.

Day by day, the development of digital products based on Blockchain technology increases and those who participate in it will continue to create different protocols that adapt to the objectives they wish to achieve, with specific characteristics for each product.

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