UncategorizedCryptoeconomics, What All Traders Should Know

July 9, 2018by cryptost_admin
by Stellan Christensen

Cryptocurrencies, or more specifically, Cryptoassets are becoming more widely distributed and learned about by those in finance and technological industries. Companies are raising millions of dollars in seconds through token issuings (ICO’s). The hype is real, but correct information is scarce. The concept of cryptoeconomics is largely foreign to most people. Cryptoeconomics is the fundamental catalyst for this whole movement, so it is imperative we stay up to date with relevant information.

Satoshi Nakamoto birthed the field of cryptoeconomics when he created Bitcoin in 2009. Just like Galileo is known as the founding father of physics, Satoshi will forever be known as the founding father of cryptoeconomics. Decentralized peer-to-peer systems based on cryptography were not new in 2009. What these earlier decentralized systems lacked was economic incentives. The lack of economic incentives is arguably what stifled these early P2P systems from persisting and developing over time. Satoshi added economic incentives to P2P systems when he created Bitcoin through consensus algorithms. It was actually previously believed to be impossible to achieve consensus among nodes (the Byzantine Generals Problem) to create a decentralized digital cash system, but Satoshi’s implementation of a proof-of-work consensus mechanism + mining incentives solved this previously unsolvable problem. Satoshi’s combination of incentives and cryptography resulted in a robust, thriving P2P payment network that today stores billions of dollars in value and processes over hundreds of millions worth of transactions daily. Satoshi’s contribution to data and value consensus will never be forgotten.

The economics behind crypto distribution is the study of adversarial environments between economic interactions. In a decentralized peer-to-peer system we must assume that there will be bad actors looking to disrupt the system. The approaches in some theories combine cryptography and economics to create robust decentralized P2P networks that thrive over time, despite adversaries attempting to disrupt the network. The cryptography underlying these systems is what makes the communication within the actors in the network secure. The economics is what incentivizes all actors to contribute to the network so that it thrives over time.

In the Ethereum Network, Vitalik Buterin designed the network to be distincted from Bitcoin in several ways. First, the scripting language is more expressive and allows a flexible fee structure for running more complex contracts. Ethereum also uses proof-of-stake consensus. Bitcoin’s proof-of-work is inefficient with electricity costs, and hardware infrastructure. Proof-of-stake is a consensus mechanism that seeks to solve the inefficiency problem by allowing the holders of the token to validate the network. Bitcoin has a monetary policy of 21 million coins to be ever distributed. Ethereum has a more flexible structure and is not set in stone at this time.

The economics of various crypto systems are important to understand because they help us evaluate the value of them monetarily. We must consider a coin’s fix/fluid supply, it’s proposed utility, and consensus mechanism for how/when they are used. When researching trades and evaluating crypto projects, take into consideration the team working behind it and the use-case being offered. Sure, you may get lucky with a over-hyped ICO, but trading based on guesses or hype is never smart in the long run.