Demystifying Crypto Terminology
Confused about the difference between ‘network’ and ‘protocol’? How about the discrepancy between ‘token’ and ‘coin’? These terms may be mistakenly used interchangeably by crypto beginners, but they do have subtle and distinct differences. Exploring these distinctions can help a crypto beginner understand the mechanics of crypto blockchains.
Protocol vs Network
Simply put, a blockchain network is a system of devices working in unison to validate transactions on a digital ledger within their system. This definition can be broadened to include not only the systems of validating devices but also the individuals and organizations running these devices.
On the other hand, a blockchain protocol is a set of rules which instruct the operations of the blockchain. The entire network must abide by these rules. Rules may include a consensus algorithm (a mechanism which allows users and machines to agree on one single source of truth and interact with one another in a distributed setting), the governance structure, incentives, and penalties.
A protocol can provide for multiple blockchain networks.
Testnets are early prototypes of blockchain networks which normally run on non-full capacity. At this stage, the developers aim to identify problems with the network or protocol before going live. A testnet will transition to mainnet once the network has launched live.
Coins vs tokens
Coins are cryptocurrencies which exist at a core level of a standalone independent blockchain. They are the native digital assets of the blockchain. An example of a coin would be the ETH on Ethereum. ETH is used as transaction fees and mining rewards on the Ethereum network.
Tokens are cryptocurrencies which are built on top of a blockchain network, and do not have their own blockchain, benefitting from its technology. An example of a token would be the ERC-20 on Etherum. Tokens are usually used to enable protocols and DApps to build on top of the layer 1 blockchain.
Layer 1 vs Layer 2 blockchains
The Layer 1 blockchain network is the core blockchain network. The protocols which preside here will also govern other blockchains which are built on top of the network via smart contracts, although additional protocols are often adopted for these other blockchains depending on needs. These additional blockchains are called sidechains, or Layer 2 blockchains.
The reason for the existence of Layer 2 blockchains is because creating a new blockchain network from scratch requires a significant amount of time investment and hefty technological skills. Furthermore, the security of a blockchain network increases as the network community expands and becomes more decentralized. Layer 2 blockchains have a much better potential to thrive by building off of a strong Layer 1 chain rather than starting with a much smaller and more vulnerable network.