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What is a protocol?
In the last issue, we talked about smart contracts.
If a blockchain is something where you transfer value by sending money from A to B, a smart contract allows you to customize that transaction.
A smart contract is a fixed piece of computer code that controls money.
That code could say "Only allow sending of funds if both Alice and Bob sign the transaction"
That's a joint checking account on the blockchain.
While joint checking accounts are interesting, we can go one step further which is when things start to get wild.
What if we could combine a series of smart contracts into a protocol?
A protocol is something that sounds confusing but isn't really.
A protocol is a set of rules for interacting in a system.
For example, the internet protocol is essentially:
1) where is this data going?
2) send it to the closest router
It's a computerized postal service.
Back to blockchain, a protocol works the same way, it's a simple set of rules for interacting with a system.
What does this look like in practice?
Let's take the real example of Compound Finance. It's a lending protocol where you deposit asset A and borrow asset B.
You can construct this protocol out of smart contracts.
>If Alice deposits asset A, Alice is entitled to borrow asset B up to 66% of the value of the asset A deposit.
>Alice may retrieve her asset A deposit only when the asset B she borrowed has been repaid.
Here you've recreated a loan with smart contracts!
It's a computerized bank.
Protocols are made up of individual smart contracts that act as modular components.
You no longer need a trusted third party like a bank to facilitate a loan, you can recreate the same functionality with a protocol!