Understanding Protocol Coins And Tokens – The Beginners Guide


Protocol Coins And Tokens

There is enormous confusion among the crypto investors in understanding different types of tokens or coins.

We have tried to explain the Difference Between Security Tokens & Utility Tokens, but there is another category that we deliberately didn’t speak about to avoid any further confusion.

This category is protocol tokens!

We all know about app coins and tokens, but protocol tokens didn’t exist in the past. However, courtesy of the ‘blockchain‘, we now have something called the ‘protocol tokens’.

It is OK if you are not able to relate to what I am saying, but eventually, you will be. Let me give you some simple examples from the evolution of the internet to make a good analogy of what is happening now, and what might happen in the future.

We all understand that the internet runs on the TCP/IP protocol. On top of it is HTTP, and then the application layer (Facebook, Twitter, Google, etc..)

TCP-IP-model

These shared protocols (TCP/IP/HTTP) have forever been used freely and improved over and over by enthusiasts or non-profit entities. And on top of these protocols, applications like Google, Twitter, Facebook, etc., were made which are now valued in billions of dollars because they control all the data of the users. And eventually, with time, they have become more and more valuable as they capture most of the economic incentives too.

While on the other hand, the underlying protocol layer despite being as much as integral hasn’t been able to create as much economic value neither for itself or its creators.

Web Protocol layer

This is because there was no method of data decentralization before ‘the blockchain’ and also no method of monetization of protocol layers existed because we never had ‘cryptographic tokens’.

But now with the know-how of ‘Blockchain/DLT’ and ‘cryptographic tokens’, the protocol layer can be monetized and can be aware of the value it is creating. That’s why a new web is going to replace the old centralized one, and it will look something like this:

Blockchain Protocol layer

Difficult to understand?

Let me give you a few reasons and examples:

Adding blockchain protocols that run via crypto tokens which can only be used through these specific tokens will push the value from application layer to the protocol layer, and that value will be reflected in tokens’ specific protocols.

The Web Of Blockchains

For example, Bitcoin and Ethereum are such protocols, and various apps are built upon them. And due to the coupled nature of protocol tokens and the services, the value of the protocol is expected to increase with adoption. And this might also reflect in the price of each protocol token in the future. (This is Metcalfe’s law)

What Are Protocol Coins?

Protocol coins or tokens are cryptographic tokens that are required to access the service that the underlying protocol provides. Usually, apps or DApps are created on these protocols, just like you have decentralized applications/exchanges built on Ethereum (e.g., Augur, EtherDelta, etc.)

That’s why, the shift from thin protocol layers (that used to have little value and economic activity) to fat protocol layers, which will be immensely valuable with increased adoption, has started. Also, this will, in-time, be reflected in the value of the blockchain-based web stack that enthusiasts around the world are developing.

Internet-Stack-Vs-Blockhain-Stack

So finally, you can envisage a future (as shown below), where we will have the internet layer (TCP/IP), and then the blockchain layer or the blockchain protocols and on top of it will be their various applications.

Internet protocols

Examples Of Protocol Coins or Tokens

Note: This article doesn’t express any solicitation or investment advice from CoinSutra. These are very early days for protocol token-based internet, so if you decide to invest in these protocols, do so at your own risk. Also, some of these protocols might be redundant and useless in future.

That’s all from my side in this article of protocol tokens. I hope this helps you in developing meaningful insights.

Also, if you have any questions regarding the same, feel free to ask in the comment section below!

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Further suggested readings on CoinSutra:

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