Cryptoeconomics

Cryptoeconomics is the application of mechanism design using the disciplines of economics and cryptography to build decentralized applications and protocols like cryptoassets.

Introduction

Cryptoassets require the ability to coordinate state amongst network actors with unknown intentions. To achieve this they require a combination of properly designed economic incentives and secure ways to store data and communicate with the protocol, Cryptoeconomics.

Economic incentives generally take two forms. Rewards and penalties. The reward to miners of Proof of Work cryptoassets such as Bitcoin are one example. While the cost of mining is the penalty.

Mining is intentionally designed to be expensive to deter attacks on the network. Incentivizing positive participation via rewarding of tokens to miners deploying their hash power to secure the network. Versus the cost to control the necessary hash power required to attack the network.

Deployment of this hash power secures data on the blockchain. Linking new blocks to the network via hash functions as the puzzles required to create new blocks are solved.

Public-private key cryptography secures communication across the network. Users provide their public key(address) so value can be delivered to them. This value is accessed using their private key which is known only to them.

Additional Cryptoeconomic primitives include:

• Proof of Stake
• Decentralized Oracles
• Token Curated Registries

Because, implementing these mechanisms requires a token to align incentives between the various stakeholders needed for a functional economic model to evolve.

Further Reading

How to Evaluate a Projects Cryptoeconomics