What is Cryptoeconomics?
Cryptoeconomics is an emerging field that revolves around the protocols involved in production, distribution and consumption of goods and services in a decentralized digital economy.
There is no official definition yet because this is a new field. But broadly speaking, it encompasses the latest technologies such as blockchain, game theory and cryptocurrencies like bitcoin.
Before we understand about cryptoeconomics, let’s briefly look into how it evolved.
Evolution of cryptoeconomics
If you take any torrent system, users can share or download files freely. However, the unwritten rule was users who download these files and have to seed them as well. But, not all users followed this rule simply because there was no economic incentive to seed and the process of seeding took up a lot of unnecessary space on the computer. As a result, peer to peer network sharing failed as a concept.
In 2008, a group or an individual called Satoshi Nakamoto released a paper about bitcoins. This concept used blockchain technology to take peer to peer network sharing to new levels. The difference between the failed sharing system and this one is that, now people had an economic incentive to follow the rules.
As a result, bitcoin has caught on in a big way and has led to the development of a new form of digital economy called the cryptoeconomics. As you would’ve guessed, it’s a combination of two words – cryptography and economics.
Why is it so called?
Bitcoins are based on blockchain technology where each block contains the hash of the previous block, so the entire chain is continuous. Each of these blocks will have transactions and a state that can change based on the nature of the transactions. For example, if one person has 100 bitcoins and wants to send 40 to another person, then these blocks will reflect the new states of 60 and 40 respectively. All these information is protected by cryptography functions like hashing, signatures and zero-knowledge proofs. This means, you’re transactions are safe and only valid transactions are allowed.
Since money in some form is exchanged for goods and services, there is economics involved. Each user has some financial incentive to perform a particular action in the peer-to-peer network. Broadly speaking, there are two types of incentives they have. The first incentive is in the form of tokens or cryptocurrencies that are assigned to users for their contribution to the peer-to-peer network.
The second incentive is rewards for doing a good and responsible task on the network. Likewise, users can also pay a fine or can even have their rights taken away for any bad acts they do. So, there is enough incentive for a positive contribution and this leads to economics.
That’s how cryptoeconomics came about.
We’ll talk in depth about this technology and how it works in future pieces. Do check back to know more about bitcoins, blockchain technology and cryptoeconomics.