Protocols are basic sets of rules that allow data to be shared between computers.
For cryptocurrencies, they establish the structure of the blockchain — the
distributed database that allows digital money to be securely exchanged on the
A security protocol (cryptographic protocol or encryption protocol) is an abstract
or concrete protocol that performs a security-related function and applies cryptographic methods, often as sequences of cryptographic primitives. A protocol describes how the algorithms should be used. A sufficiently detailed protocol includes details about data structures and representations, at which point it can be used to implement multiple, interoperable versions of a program.
Cryptographic protocols are widely used for secure application-level data transport. A cryptographic protocol usually incorporates at least some of these aspects:
- Key agreement or establishment
- Entity authentication
- Symmetric encryption and message authentication material construction
- Secured application-level data transport methods
- Non-repudiation methods
- Secret sharing methods
- Secure multi-party computation
For example, Transport Layer Security (TLS) is a cryptographic protocol that is used to secure web (HTTPS) connections. It has an entity authentication mechanism, based on the X.509 system; a key setup phase, where a symmetric encryption key is formed by employing public-key cryptography; and an application-level data transport function. These three aspects have important interconnections. Standard TLS does not have non-repudiation support.
DeFi protocols are supporting an array of online marketplaces that allow users to exchange products and services globally and peer-to-peer—everything from freelance coding gigs to digital collectibles to real-world jewelry and apparel.
What Are the Benefits of Decentralized Finance?
Decentralized finance leverages key principles of the Ethereum blockchain to increase financial security and transparency, unlock liquidity and growth opportunities, and support an integrated and standardised economic system.
- Programmability: Highly programmable smart contracts automate execution and enable the creation of new financial instruments and digital assets.
- Immutability: Tamper-proof data coordination across a blockchain’s decentralized architecture increases security and audibility.
- Interoperability: Ethereum’s composable software stack ensures that DeFi protocols and applications are built to integrate and complement one another. With DeFi, developers and product teams have the flexibility to build on top of existing protocols, customize interfaces, and integrate third-party applications. For this reason, people often call DeFi protocols “money legos.”
- Transparency: On the public Ethereum blockchain, every transaction is broadcast to and verified by other users on the network (note: Ethereum addresses are encrypted keys that are pseudo-anonymous). This level of transparency around transaction data not only allows for rich data analysis but also ensures that network activity is available to any user. Ethereum and the DeFi protocols running on it are also built with open source code that is available for anyone to view, audit, and build upon.
- Permissionless access: anyone with a crypto wallet and an Internet connection, regardless of their geography and often without any minimum amount of funds required, can access DeFi applications built on Ethereum.
- Self-Custody: By using Web3 wallets like MetaMask to interact with permissionless financial applications and protocols, DeFi market participants always keep custody of their assets and control of their personal data.