The language describing blockchain technology can be confusing. Blockchain network and blockchain protocol are often used interchangeably. Same with token and coin. However, there are subtle but distinct differences between these terms, and exploring their nuances can shed light on how a blockchain works.
By definition, a blockchain network is a system of devices connected via the internet, working together to create and validate a ledger of the transactions happening within their shared system. In a broader sense, the term blockchain network is often used not only to describe the system of devices and software taking part in the blockchain, but also the individuals, organizations, and institutions that are operating those devices.
The protocol is a set of predefined rules that dictates how a blockchain operates, and that all network participants must abide by in order for the blockchain to function. These rules may include the type of consensus algorithm that defines how nodes interact with each other, the governance structure, incentives (e.g. inflationary rewards) and penalties (e.g. slashing) for participation, and application interfaces, if needed.
In short, a blockchain network is the blockchain ledger plus everyone contributing to the ledger, while a blockchain protocol is the rules that govern the blockchain network.
These two terms may seem to be used interchangeably, but as a rule should not be. For example, “the Prairie network is growing” indicates that more people are participating in the Prairie blockchain over time. “The Prairie protocol includes slashing” indicates that the rules governing how the Prairie blockchain functions include mandates about slashing.
Additionally, a protocol can provide the structure for more than one network, usually as development teams work to bring a new blockchain network to full implementation or to create a mirror network for experimenting with new development tools in a test environment.
Protocols are developed by teams of people, such as foundations, private companies, or groups of developers. Protocol development teams collaborate to design a protocol with parameters that will create the blockchain they envision, once other participants join in the network to make it live. In the process of doing so, protocol teams regularly steward multiple blockchain networks that follow the same protocol.
Testnets are early prototype versions of blockchain networks that typically do not run with full capacity. The testnet is deployed by programmers to identify problems with the software or design of the protocol prior to full deployment. When a network transitions from testnet to mainnet, it is typically considered to have gone live for use. Testnet participants use testnet tokens or coins to interact with the network, which are assets without monetary value that function in exactly the same manner as mainnet assets will upon mainnet launch. Though the same protocol governs both the testnet and the mainnet, the testnet and mainnet are two separate networks with different ledgers and differing fiscal realities.
Kusama is considered a canary network, or an experimental blockchain environment with real economic conditions. It serves as a proving ground where developers can build and deploy products, services, and other code functionality for the Polkadot ecosystem. Kusama and Polkadot are both built using Substrate; they both have almost the same protocol codebase despite being entirely separate blockchain networks.
Like network and protocol, the terms token and coin are often confused when describing blockchain-based digital assets. This confusion is reasonable, to some extent, as both tokens and coins serve the same essential function within blockchain networks. However, there is an elemental difference between the two.
Digital assets, which include both tokens and coins, are used to keep blockchain networks running. They enable protocol rules, and network participants can use them to pay transaction fees or enact governance, receive them as rewards for their work keeping the blockchain operational, or stake them to help secure the network. They function as stores of value and/or act as units of account.
Coins are defined at the core level of a blockchain protocol—they are the native digital assets of a blockchain. Conversely, tokens are built at a higher level, on top of a blockchain network. While coins are used to keep the base layer blockchain operational, tokens are generally used to enable the protocols or applications built on top of the Layer 1 chain.
For example, the native coin of the Ethereum network is Ether (ETH). ETH is used for transaction fees within the Ethereum network as well as for mining rewards paid to the participants that secure the Ethereum network. The Ethereum protocol allows for blockchains (called sidechains, or layer-2s) and applications to be built on top of the network by way of smart contracts. These solutions take the computations for their transactions off of the base layer Ethereum blockchain, checking in periodically via smart contract with the base layer chain to cross-check their chain or app’s validity.
The digital assets used to enable the functions of those sidechains and applications are tokens. Within Ethereum, those tokens take the form of ERC-20 tokens, meaning they are tokens that function within the parameters of the Ethereum ecosystem. However, the transaction fees for the token transactions within these solutions built on top of Ethereum must still be paid in ETH.
Creating a blockchain network from scratch is time consuming, and requires a high level of technical proficiency along with a lot of buy-in from other stakeholders and participants. Having a large number of participants in a blockchain network increases its decentralization, thus making the network more secure, but building up a community of network participants is not an easy task.
It often makes more sense for someone who needs to use a blockchain—such as a dApp developer with a particular use case, like secure data sharing, in mind—to participate in a strong, active blockchain network rather than start a smaller, weaker blockchain network that is more vulnerable to attacks or crashes.
Because of this, it is common for developers to build a sidechain (often referred to as a layer-2 chain) or decentralized application on top of an existing network. In doing so, their blockchain adopts the protocol rules of the network they are built within, though they often institute their own protocol to establish further rules specific to the new chain.
Blockchains built on top of existing networks, as well as decentralized applications built on top of existing networks, benefit from operating within an established protocol, leveraging established consensus to verify their transactions, and being able to use digital assets in their functions.
So what do you do with all of these coins and tokens? How do you participate in a blockchain network? Learn more about how to earn rewards via the delegation and staking of digital assets, and how to get involved, in our Delegating digital assets 101 post.
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Bison Trails is a blockchain infrastructure platform-as-a-service (PaaS) company based in New York City. We built a platform for anyone who wants to participate in 23 new chains effortlessly.
We also make it easy for anyone building Web 3.0 applications to connect to blockchain data from 33 protocols with Query & Transact (QT). Our goal is for the entire blockchain ecosystem to flourish by providing robust infrastructure for the pioneers of tomorrow.
In January, 2021, we announced Bison Trails joined Coinbase to accelerate our mission to provide easy-to-use blockchain infrastructure, now as a standalone product line. The Bison Trails platform will continue to support our customers. With Coinbase’s backing, we will enhance our infrastructure platform and make it even easier to participate in decentralized networks and build applications that connect to blockchain data.