A protocol on a blockchain is a set of smart contracts that define the rules for interacting with a system.

A good example is Uniswap, an exchange protocol whose growth has been astronomical.

By exchange protocol I mean you send asset A to the protocol and it sends you asset B.

The whole thing works with smart contracts, fixed computer code you upload to the blockchain that control money.

For example:

If contract receives asset A, return to sender the corresponding amount of asset B

In Uniswap's case, the contracts allow anyone to supply 2 assets to a pool in a 50:50 ratio. This allows Uniswap contracts to hold money for people to trade into.

A->B or B->A.

There are no humans involved except yourself and the people that have supplied liquidity for the trade.

Anyone can trade with this system, and anyone can provide liquidity. Liquidity providers earn fees.

It's even possible for people to create their own markets by supplying ETH + any arbitrary token.

Imagine an entrepreneur issuing shares and immediately having a place for their shares to trade. No exchange listing requirements or fees. No gatekeepers. Worldwide access. Instant trading.

Uniswap is permissionless finance for trading and market-making.

Compare this to a traditional exchange who:

Can deny you service at any time.
Don't serve people in many countries for compliance and cost reasons.
Slow to list assets
Requires brokerage account
Have to be trusted with your money
Add friction
Charge extra fees
Collect your data
Requires constant maintenance

Protocols don't have these problems. They are equally accessible to all and cost the same whether you're in rural Africa or Goldman Sachs.

Uniswap requires 0 maintenance.

The Uniswap protocol is so successful, it's been earning more fees than Bitcoin lately.

And starting to surpass its traditional competitors.

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Why protocols > companies. An overview of…