Protocol or Product?

True DeFi protocols are immutable, permissionless systems that spark independent third‐party innovation.

By Gareth on 14th Mar, 2025

First lets define Protocol in the computing context. ChatGPT says:

A protocol is a defined set of rules and conventions that determines how data is exchanged between systems, applications, or components

Examples are HTTP or TCP/IP.

I'm interested in this questions because a lot of DeFi projects like to call themselves protocols, and I'd like to understand where that's true.

True protocols are permissionless and allow for a kind of cambrian explosion of innovation on top. For example, if you think about how the early web protocols facilitated the explosion of innovation on the internet. Another good example is Ethereum, it has similarly facilitated an explosion of permissionless innovation on top of it's protocol for decentralised execution and state.

But what DeFi protocols built on Ethereum are actually protocols and which are products masquerading as protocols?

If I try to define it, I'd say that it's the immutability of the core contracts, their accessibility and how much human intervention is required to maintain that accessibility.

So lets say you have a DeFi project who's core contracts are immutable. But the only way for a layman to interact with those contracts is through the DeFi project's UI. Is that a protocol?

I don't think so.

I think a lot of DeFi protocols are yet to ascend to true protocol status.

My 2 cents, a DeFi project is not a protocol until the majority of the usage of their core contracts comes through third parties, i.e. not facilitated in any way by the team that deployed the contracts. You could go as far as saying unknown 3rd parties to exclude projects who pretend other parties are building on their contracts by breaking off into smaller teams or relying on a single partner integration.

Once a set of core contracts become a true protocol they are essentially an independent entity. As long as the underlying blockchain lives, they will live and be useful.

However, the core difference between DeFi protocols and web protocols is tokenomics. DeFi projects that successfully create a protocol can, in many cases, turn on a fee and earn revenue from the protocol they initiated. That is a huge difference to web protocols which relied on funding from various benefactors.

So what will the HTTPs of the DeFi world, if they have substantial revenue streams, look like in the future?

Lets imagine a hypothetical situation in which the people involved in establishing the HTTP protocol could have applied some tokenomics and started generating revenue from all the usage on top of the protocol. Assuming that the revenue would be extremely large, in the order of billions, what would that team do in the market with that financial power?

Side-note, HTTP is largely worked on by an organisation called the IETF (Internet Engineering Task Force). Improvements are made through RFCs (Request for Comments). IETF is apparently funded through various mechanisms from 'meeting' fees to corporate sponsorships, but as far as I can tell, a lot of supporters simply volunteer and it has no direct revenue, it is a 'non-profit'.

If you ignore the impossible network effects to overcome, there is no real financial incentive to develop a competing HTTP. The question is, if there were tokenomics involved in internet protocols, how would that change the internet?

I guess you would have many competing, alternative, internets, with different functionalities and tradeoffs, but I assume power/network laws would still establish a monopoly.

So perhaps we might have ended up with browsers that let you switch between different internets depending on you requirements/preferences. But still, the vast majority of internet users would have probably settled on 1-2 primary solutions.

So my point being, even if you introduce tokenomics to protocols, you still end up with monopolies.

Why is this question important? Why is it important to understand what DeFi projects are true protocols?

Because blockchains have given us the tools to build a permissionless economic system.

I believe blockchains are permissionless maximisation engines and so if you try to build permissioned systems/products on top, sure you might have some success, but a more permissionless version of your system will come along and eat you for lunch. See what Morpho is to Aave...