The Triumph of Open Protocols

Crypto represents the development of a native ownership & property layer for the Internet

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Coinmonks

9 min readMar 26, 2022

Like the Web and the Internet itself, the foundation of Crypto is built upon Open Protocols. Open Protocols (like TCP/IP, HTTP, and SMTP) specify public rules for how participants should talk to each other — what messages to send over the wire, what constitutes a valid state to be in.

Crypto network protocols are cut from the same cloth as their predecessors and will continue to succeed because they harness many of the same powerful dynamics of open participation and permissionless innovation, as well as new and even more powerful growth dynamics.

Like their predecessors, these protocols have a few key properties worth calling out:

Internet-native: Built for and on top of the Internet. Constructed from pure information.
Open: Anyone can participate. There is no authority to get permission from first. Growth can occur organically, without gatekeepers. All information is public, from wire formats to state data to source code. The environment is one of radical transparency.
Builder-Friendly: Innovations are public, and compounding. Builders are welcome and incentivized, and they flock to the opportunity.
Opt-In: Enforcement of rules is fair and peer-to-peer. There is no out-of-band mechanism of compulsion for non-adherence to protocol rules, though if you don’t play by the rules, other participants will shun you (reject your messages or states as invalid).

The Early Internet

The Internet began as an American military experiment in radical decentralization. Shocked by the launch of Sputnik, from 1956–1972 the US Department of Defense funded advanced blue-sky research within the Advanced Research Projects Agency (ARPA), including a project to build a network that could withstand a nuclear attack, by avoiding reliance on centralized points of control.

By 1972, ARPA found itself operating three different experimental networks that all operated in completely different ways, and spoke different networking “languages”: ARPANET, the seminal mainframe resource sharing network; PRNET, a radio-based network inspired by work from the University of Hawaii, and SATNET, which linked seismic monitoring stations in Scandinavia to the US via Satellite.

The “internetworking” project to stitch these different networks into a seamless whole began in 1973. Two major alternatives were considered: the first was to set up permissioned gateway computers that would serve to translate between the different network languages; the second was to define a suite of open protocols, common networking languages and conventions, that any network that wanted to join this “internetwork” could speak in order to gain entry. This protocol suite became known as TCP/IP.

The decision to adopt the open protocol approach meant that this “inter-network” (Internet) could grow organically, through the free and independent decisions of network administrators to choose to opt-in.

Innovation compounded, and an explosion of additional open protocols followed, such as HTTP (the web) and SMTP (email) was built on top. The open protocol design created an architecture for permissionless innovation, enabling a never-before-seen explosion of disruptive entrepreneurial creativity.

The defining characteristic of these open protocols is that they define rigorous rule-based procedures by which human beings (through their software agents) can communicate & cooperate with each other. Although the details are highly technical in nature, their heart is voluntary, opt-in human cooperation. Like the development of money, these protocols have enhanced the social scalability of human society.

The Bitcoin Protocol

If your only experience of Bitcoin is buying it on a custodial exchange or seeing its ticker price on television, it’s very easy to miss the fact that Bitcoin, at its lowest level, is an open networking protocol, added to the Internet’s stack in 2009 by Satoshi Nakamoto.

In Bitcoin’s protocol, Person A can request to send funds to Person B by broadcasting a transaction to miner M. Thanks to this protocol, M can (and will) be a random stranger on the Internet. There is no need for M to be some trustworthy institution with a brand and FDIC insurance, and there is no need for out-of-band threats of court enforcement for any misbehavior on M’s part. M might even be a malicious hacker, but still A and B will have nothing to fear. If anyone breaks the protocol’s upfront-agreed rules, honest participants will simply refuse to consider what they do valid. Everything works so long as there is a majority of honest participants on the network. It is a miraculous advancement in human cooperation that this elegant protocol allows all participants to reach secure, rules-based consensus on what the ledger should contain, even in the face of malicious cheats.

This is a cooperative system for the transfer & storage of value between opt-in participants (sender & receiver), facilitated by other opt-in participants (miners). This system has now run without serious interruption or incident for more than a decade, remaining resilient against highly adversarial attacks, including the forced shutdown of 50%+ of mining hash power by China in May 2021. It now stores $1T+ in value (with $20T+ settled). The only requirement of participants is that they follow the transparent and pre-agreed rules of the protocol. It should not be all that surprising that as the network has proved itself over time, and the number of participants has grown exponentially (and continues to grow), the value of Bitcoin has grown exponentially as well.

That this stunningly successful, peaceful, cooperative, entirely opt-in arrangement between individuals can somehow manage to inspire fear & dread in some entities should tell you a lot about those entities. It’s the kind of reaction I would expect from an entity that fears and dreads the free exchange of ideas, information, and messages between people. And that’s pretty much what we see in practice.

The “Bitcoin maximalist” camp would prefer that I end the story here, but I’ve come to see the innovation of Programmability from other “smart contract” blockchains as also representing a crucial development, since it is programmability that enables further permissionless innovation from independent builders and entrepreneurs on top.

Programmability

“Smart Contract” crypto networks such as Ethereum innovated further on ideas from Bitcoin and brought the concept of Programmability to the forefront. On these networks, Person A can not simply send money to Person B; they can deploy arbitrary software code to the network and allow any other person to interact with their software, which can in turn express any kind of agreement for how to move funds. You can have contracts for borrowing/lending, swapping, you name it. Furthermore, deployed contracts can interact with the contracts offered by others, allowing for composable and reusable building blocks to be built.

Note that programmability enables one of the hallmark principles that made the web successful: Permissionless Innovation. Just as any entrepreneur can launch a website without seeking anyone’s permission, in Decentralized Finance (DeFi) anyone can launch a contract-based financial service, and benefit from smart contracts’ abilities to handle and move funds on behalf of users.

Let’s take an AMM (Automated Market Maker) contract as an example — e.g. Uniswap on the Ethereum network. This contract consists of code that maintains pools of paired assets (e.g. ETH and the “stablecoin” USDC). Person A can deposit their ETH into a pool for the purpose of facilitating the trades of others (e.g. Person B, who comes along later wishing to buy ETH in exchange for USDC). Person B will be charged a small fee for this service, and a proportional share of such fees accrue back to Person A. So, this arrangement enables Person A to earn a yield on their deposited assets. In the legacy financial system, this yield potential from fees is invariably captured by the banking intermediaries and custodians that you are forced to entrust your assets to.

DeFi has become a vibrant hothouse of experimentation in which builders have a never-before-seen platform to experiment with crypto-economic incentive structures (“tokenomics”) in real-time. They can involve their early community in the building process, and these early users are rewarded for their participation with tokens that function similarly to startup equity, aligning the incentives of all participants. The platform provides natural paths to monetization through fees or token issuance.

In DeFi, the air is electric with experimentation and new ideas. It reminds me strongly of the early days of the web. This has fostered a unique rocket-fueled innovation environment that is impossible to replicate in the closed, permissioned legacy system.

The Legacy World of Closed Protocols

The openness of Crypto protocols stands in stark contrast to our hopelessly centralized & captured financial system.

This is a system of closed, human-driven protocols and top-down control. Enforcement of rules is arbitrary and at the discretion of elites, rather than encoded fairly in code and applied to all. Permission to access and participate is very much required. Innovation in many areas has been actively suppressed.

Take the ACH payment network responsible for direct deposits, for example. ACH has been run by Nacha (the National Automated Clearinghouse Association, spun out of the American Bankers Association) in substantially the same form since 1974. ACH is fundamentally a batch-settled system, with expected settlement times subject to processing cutoff times and banking holidays. So in 2022, it is still the case that if your transaction is issued after 2:45 PM ET the day before a 3-day weekend, then you’re going to be waiting four days or more for it to settle.

Closed protocols like these use Internet communications technologies, but are not Internet-native. They are a thin digital veneer laid on top of the old world of banking. They simply facilitate slightly-faster communication amongst bankers, lawyers, and bureaucrats. Crypto is the opposite: Internet-native open protocols for the world of money, banking, & finance.

The Future of Open Protocols

It is unfortunate that crypto-natives spend as much time and energy as they do arguing amongst themselves, advocating for their favored network or token, whether it be for Bitcoin, Ethereum, or something else. They never tire of drawing contrasts between the properties of these crypto networks: which one scales better, which one is more decentralized. But we should not lose sight of the far bigger and more important contrast, which is between crypto as a whole and the traditional, “closed” financial world.

My own belief is in a “Multi-Chain Future” in which we see these networks increasingly connected, aggregated, and bridged together into a seamless whole. And I believe we will see this “open” financial world continue to grow at an astonishing pace relative to its “closed” counterpart.

The triumph of open protocols is now so complete and total that it is difficult to remember that it was once contingent, even controversial. Telephone monopolies like AT&T tried their best to contain and kneecap this approach in favor of a “virtual circuits” concept that would better preserve their monopoly power. Powerful computer and telephone interests allied with policymakers and the Department of Defense to push an alternate protocol stack called “OSI” that ended up basically being negotiated to death in trying to reconcile all the competing interests. Meanwhile, the “just do it” spirit of the TCP/IP open protocol stack leapt up and circled the world while these alternatives were still lacing up their boots. The success of the TCP/IP open protocols then eventually became a fait accompli. I suspect we will see a similar dynamic with Crypto, for similar reasons.

America’s Opportunity

America invented the Internet. This invention brought broad-based, shared technological abundance to the entire planet, and it also made America rich: America’s crown-jewel Internet companies have represented the majority of its equity market outperformance over the past decade.

Crypto has the potential to become a new pillar of American success and wealth creation over the next decade. Closed societies, accustomed to censorship and capital controls, will struggle to lead in an open-protocols world. Innovating on open protocols is a game that plays to American strengths. America has won this game before and will win it again.

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The Triumph of Open Protocols

Crypto represents the development of a native ownership & property layer for the Internet

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Written by EVK