What comes to your mind whenever you stumble upon a word that starts with 'crypto' prefix? At this particular era of cryptocurrencies, that is the first thing that will pop into your mind. Cryptocurrencies came and took over the exchange market by a storm. With this new medium of exchange, a new terminology emerges: Cryptoeconomics.
To answer what cryptoeconomics is, we have to explore cryptography and computer networks combined with game theory to achieve a secure and decentralized system with the ability to thrive over time. Here is where the 'economics' part comes in. Ethereum developer Vlad Zamfir explains cryptoeconomics as a discipline that examines the protocols that regulate production, issuance and consumption of goods and services in a localized digital economy.
The approach that game theory uses is that given a puzzle, try to understand the best strategies that each player can follow. This means that every decision that a player can make must anticipate the reaction of the stakeholders.
The question to ask here is: What is the relationship between cryptocurrencies and cryptoeconomics? As an example, we focus on bitcoin.
The cryptoeconomic properties of bitcoin are as follows:
- It is built upon blockchain technology, which focuses on creating a sequence of immutable blocks. This means that addition of new blocks should be supported and this process should not tamper with the old blocks.
- Each block includes transactions.
- Each block must have a particular state that defines it and this state is subject to change according to transactions.
- The blockchain should be designed to be downloadable and transactions be easily accessible.
- Only valid transactions can be allowed onto a block.
- For each of the created blocks, a clock must be maintained to monitor it.
- The clock must be in a state of increment: i.e always increasing
Diving deeper into cryptoeconomics, we list three examples below:
Consensus Protocols:
The main concept here is that block chains are able to reach a valid consensus without consulting a central trusted party.Cryptoeconomic Application Design:
It should be possible to build applications based on a blockchain. The blockchain provides the following:
I) A unit value which can be used to come up with incentives and penalties.
II) A toolkit that facilitates the design of conditional logic in form of smart contract code.State Channels:
These are techniques that most blockchain applications can use to become more efficient. The approach that these state channels use is to move many processes off-chain while maintaining the characteristic trustworthiness of the blockchain by means of cryptoeconomic design.
Conclusion:
The future of cryptoeconomics is hard to predict since it is a young field in the market but with the enthusiastic embrace that people have shown to cryptocurrencies, there's no doubt that cryptoeconomics has a potential of thriving in the society.