Protocols are basic sets of rules that allow data to be shared between computers. For cryptocurrencies, they establish the structure of the blockchain — the distributed database that allows digital money to be securely exchanged on the internet. Bitcoin entered the world in the form of a white paper written by a pseudonymous person or group going by the name of Satoshi Nakamoto. The paper, which was posted to a cryptography message board in 2008, outlined a set of computational rules that established a new kind of distributed database called a blockchain. The blockchain would work like a ledger, tracking every Bitcoin transaction, and would be self-verifying — constantly checked and secured by the computing power of the entire network.
“Miners,” whose computers do the heavy lifting of maintaining the chain, would be rewarded in Bitcoin. Collectively, these rules form the Bitcoin protocol — quite literally, they are Bitcoin. Of course, protocols aren't exclusive to cryptocurrency. They’re fundamental to how the internet works, governing the transmission of data from one computer to another. Email, for instance, is based on several sets of protocols. The HTTP you see at the beginning of every URL? It stands for “hypertext transfer protocol.” The Bitcoin protocol proved that digital money could be exchanged safely on the internet. In its wake, thousands of new forms of digital money, each with their own protocols, have followed. And over the subsequent decade-plus, fundamental breakthroughs in cryptography, and decentralized computation have continued to open up new possibilities for blockchain protocols.
Protocols allow cryptocurrencies to be decentralized via the blockchain — which means they are spread across a network of computers with no central hub or authority.