Before APR, Before Wallets… What Even Is a Protocol?
2025/06/22
I watched a video about DeFi that was supposed to be introductory. Even before getting to the topics it was meant to cover (like which instruments to choose for investing), I found myself overwhelmed by questions that made it hard to move forward:
What is a protocol?
What is a network?
Do networks compete with each other? Do they complement each other?
How are projects built on top of a network?
How are protocols built on top of a network? Is there a difference between a project and a protocol in this context?
Why is the phrase “protocols added to this network” used? Is there a difference between “built on” and “added to” (in the context of protocols and networks)?
How does a protocol generate profit?
How does a network generate profit?
Projects hold assets in various coins. What does that mean, and why do they do it?
All the words seemed familiar, but the meaning wasn’t just slipping away — it felt more like everything was confidently stated in the video, almost casually, as a warm-up before getting to the real part: farming APR “with your fingertips.”
So far, I only had the energy to grasp — in the most general terms — what a protocol and a network are.
What I Managed to Understand
A protocol is a set of rules that defines how crypto operates. Roughly speaking, it can be divided into two layers:
Base protocols like Bitcoin or Ethereum (Layer 1), and
Application protocols like Arbitrum or Optimism, which are built on top of Layer 1.
Most application protocols emerge from Ethereum.
A network is the physical infrastructure — computers, ASICs, and probably other devices — that act in coordination according to the protocol.
