DigitalForest Blog

Fat protocols in blockchain

Overview of a fat and thin protocols concept
Kristina Novikova
Research Analyst at DigitalForest
December 19, 2019
Originally, a fat and thin protocol concept appeared in a Joel Monegro article in a blog post on USV.com. The author tells how fat protocols create value in a public blockchain and where this value is actually captured.

It should be noted that by the term "value" in this particular article we mean a material value of a blockchain network, and more precisely, its capitalization.

According to this article, today a core capital that exists in public blockchains, such as Ethereum and Bitcoin, is aggregated at the protocol level and not at the application level. In our article, we will thoroughly examine what that means.

Protocols and applications

To get started, let's take a look at the definition of a protocol and an application.

A protocol in IT terminology is a set of rules and agreements used by protocol participants. At the moment, there is a huge number of various protocols. For example, TCP/IP is one of the protocols for data transmitting over the Internet, SMTP is one of the protocols for e-mail services provisioning, VOIP is a group of protocols for transmitting voice traffic over the Internet.

An application is a software or a program that a user interacts with. For example, Facebook is a web and mobile application that exists over various Internet protocols. In our article, we only take into consideration web and decentralized applications (dApps), because they require network interaction for their operation and, therefore, they use network protocols or, in the case of dApps, protocols of a particular blockchain network.

An application, in turn, is software or a program that a user interacts with. For example, Facebook is a web and mobile application that exists over various Internet protocols. In our article, we are only talking about web and decentralized applications (dApps), because they need network interaction for their work and, therefore, they use network protocols or, in the case of dApps, protocols of a particular blockchain network.

The relationship between a protocol and an application can be easily described as follows: an application is something that exists above the protocol level.
Read the overview of blockchain consensus algorithms

Overview of 9 most popular consensus algorithms for blockchain networks : PoS, PoW, DPoW and others.

Where is value captured?

In fact, at the moment, all the value that creates the cryptocurrency capitalization is aggregated the blockchain protocol level. For example, a significant amount of funds is tied to the Ethereum blockchain network, which is basically a fat protocol. The same applies to other cryptocurrencies: Bitcoin, Litecoin, etc. Even though some of these blockchains can have dApps over them, these applications capture only a small part of the total value of the blockchain network.

In this case, the term fat implies such blockchain protocol property as an ability to carry significant financial value, since it not only ensures the operability of the network but also stores the data providing the value of the entire network. In turn, the thin protocol ensures the network's operability and access to it through applications, while the essential value of the network is aggregated by applications that exist over this protocol.
This concept is captured in the image below.

The emergence of fat protocols

The emergence and development of fat protocols are determined by the following:

  • Existence of a single shared data layer, which is accessible by all network participants
  • Presence of cryptographic tokens, which provide network operability and value
The shared data layer allows storing user information in an open and decentralized network, rather than in separate applications that have control over information storages. This type of data access, which is characterized by the absence of a single network management point, attracts new users. That, in turn, increases the value of such network, attracts more network and application developers and increases the overall value of the entire ecosystem.

Developers invest their time and money in creating applications that use fat protocols, helping to increase the value of protocol tokens. Consecutively, it attracts new participants: miners, investors, and others. With the advent of financing, new applications start to be developed, and that attracts even more users, developers, and investors.

Thus, the more successful applications appear in the ecosystem, the more value is accumulated at the fat protocol level, increasing its market capitalization.

In conclusion

The concept of fat protocols is still under discussion in the blockchain community. Some members believe that blockchain network protocols tend to decrease every time a hard fork is performed. In this case, the value is divided into several parts, and a certain number of developers, users and investors move their activities from the original network to a new one, thereby reducing its capitalization. Also, some blockchain experts believe that hard fork increases the value of both blockchain networks. This happens because the total capitalization of the original and newly appeared blockchain networks is usually greater than the capitalization of just the original network, and the decrease of the original blockchain network capitalization is usually insignificant.
So what do you think about this concept? Send us your questions and comments via the form below.

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