Understanding how the internet works and why Ethereum will be the next Internet 2.0. Hacks, data breaches, user privacy are just a few concerns with our current system and it has to change.
Let’s start with protocol. In the technology world, a protocol is a set of rules.
For instance, the internet is governed by two protocols: TCP and IP.
TCP stands for transmission control protocol. This is a set of rules that governs the exchange of packets of data over the internet.
IP stands for internet protocol. This is a set of rules that governs sending and receiving data at the internet address level.
IP by itself is something like the postal system. It allows you to address a package and drop it in the system, but there’s no direct link between you and the recipient. TCP/IP, on the other hand, establishes a connection between two hosts, so they can send messages back and forth for a period of time.
Nobody owns TCP/IP. But imagine if someone did. How valuable would the protocols be?
Think about this…
According to a Harvard Business Review article, more than half the world’s most valuable public companies have built business models on TCP/IP.
That’s $5.4 trillion dollars in value traced right back to TCP/IP.
Think of the biggest names in the internet space: Amazon, Google, Facebook, Priceline, eBay, Netflix, Uber, etc… They are applications, not protocols (see the box below for the difference between the two terms).
Applications (or “apps”) are computer programs that run specific tasks. They include simple desktop apps like calculators, clocks, and word processors to mobile apps like media players, games, instant messengers, and maps.
Google’s YouTube, Facebook’s Messenger, and Microsoft Word are examples of popular web applications. Companies own their applications.
Protocols are the rules computers use to communicate with each other. TCP and IP are examples of widely used protocols. Unlike applications, no one owns computer or internet protocols.
For instance, the Ethereum platform has created a protocol for the issuance of crypto tokens (among many other things).
Ethereum has created rules that make it easy to launch and manage digital tokens. That’s why more than 50% of new tokens coming to market are using the Ethereum platform.
As more projects are launched on the Ethereum network, the demand for ether tokens increases.
Said another way, the more the protocol is used, the more valuable the ether tokens become.
These protocols are called “fat” because most of the economic value and profits will be captured at the protocol level.
All the tokens launched on the Ethereum platform are only worth $6.8 billion. But the Ethereum platform itself is now worth $34 billion.
Even as more and more companies go “public” on the Ethereum platform, I think Ethereum will be more valuable than the applications that end up running on it.
The reason is that the more the protocol is used, the more demand is generated for the underlying protocol token. That’s how utility coins like ether gain their value.