Cryptoeconomics is not economics for crypto

Cryptoeconomics is one of the most exciting aspects of crypto and it doesn’t mean a simple adaption of economics to cryptoassets, as many naturally think. There are many new possibilities, which Josh Stark writes about in an overview of cryptoeconomics at CoinDesk:

In simple terms, cryptoeconomics is the use of incentives and cryptography to design new kinds of systems, applications, and networks. Cryptoeconomics is specifically about building things, and has most in common with an area of mathematics and economic theory.

Cryptoeconomics is not a subfield of economics, but rather an area of applied cryptography that takes economic incentives and economic theory into account. Bitcoin, ethereum, zcash and all other public blockchains are products of cryptoeconomics.

He begins by using Bitcoin as an example:

Bitcoin’s innovation is that it allows many entities who do not know one another to reliably reach consensus about the state of the bitcoin blockchain. This is achieved using a combination of economic incentives and basic cryptographic tools.

Stark explains that cryptoeconomics is more closely related to mechanism design than economics.

Mechanism design is often referred to as reverse game theory because we start with a desired outcome and then work backwards to design a game that, if players pursue their own self interest, will produce the outcome we want.

Stark includes examples of three different examples and concludes by discussing the difference between a centrally-managed blockchain and a truly decentralized blockchain.

Blockchains that are simplydistributed ledgers and do not rely on cryptoeconomic design to produce consensus or align incentives might be useful for some applications. But they are distinct from blockchains whose whole purpose is to use cryptography and economic incentives to produce consensus that could not exist before, like bitcoin and ethereum. These are two different technologies, and the clearest way of distinguishing between them is whether or not they are products of cryptoeconomics.

Secondly, we should expect that there will be cryptoeconomic consensus protocols that do not rely on a literal chain of blocks. Obviously, such a technology would have something in common with blockchain technology as we call it today, but labelling them blockchains would be inaccurate.

Lots more in his article on cryptoeconomics.

Leave a Reply

Your email address will not be published. Required fields are marked *