What is blockchain from cryptoeconomics perspective?

Whoever explained something about blockchain did it from a technical or development perspective. What about talking about blockchain from an economical point of view and try to understand how blockchain is affecting our economy?

Let’s start with an easy step and see what cryptoeconomics is. According to BlockchainHub cryptoeconomics “is the study of economic interaction in adversarial environments” . It turns out to be the combination of two factors:

Cryptoeconomics = Cryptography + economics

On one side through the use of economic incentives the system encourages all actors to behave in such a way that allows the network to operate smoothly and succeed over time. On the other side through encryption (cryptography) we can design a secure system or network with defined properties.

We can take as an example Bitcoin, Satoshi introduces an economic incentive layer to a P2P network in order to coordinate the network of participants and increase in this way the reliability of the system.

Some of the processes in the network can fail or can be unreliable, nevertheless consensus protocols must be fault tolerant, attack and collusion resistant. What does that mean?

  • Decentralized systems are less likely to fail since they are relying on many separate components.
  • These systems are more expensive to attack, destroy or manipulate.
  • It is less likely a collusion of participants that act in their own benefit since there is no a central authority.

So, why is cryptoeconomics so important for decentralized blockchain networks?

Through cryptography and economic incentives it is possible to create decentralized networks without the need of a trusted central authority that has control over their functioning. Moreover, cryptoeconomics allows parties that do not know each other to cooperate and reach consensus about the state of blockchain.

What challenges imply building incentive mechanisms?

Bitcoin was designed to align incentives of computers, right? Now, 10 years later after its releasing we are building huge projects using blockchain technologies and we still assume the efficient market hypothesis and the wisdom of the crowd. Therefore building incentive mechanisms into a decentralized system without a central authority results in a complex task. The reason for this is because cryptoeconomics intends to combine technically implemented rules with unpredictable human behaviour.

That makes cryptocurrencies so hard, and that is the reason cryptoeconomics is so important. When rules are not properly defined, the decentralized systems can collapse. So how can that be solved? Through designing mechanisms that incentivize and disincentivize behaviors that could be implemented for decentralized systems.

Incentive design has become much more sophisticated and it has been applied for more complex systems. Few of the initiatives developed are:

  • Steemit, is a blogging and social networking website that rewards and votes publishers and curators through blockchain.
  • Numerai is a crowd-sourced hedge fund that uses AI to determine trades and is fueled by thousands of data scientists
  • Zcash is a cryptocurrency that better enhances privacy for its users through cryptography.

These examples and much more have made the incentive design to be one of the features that will end up destroying the blockchain system. It is possible to solve that by building more robust incentive systems, nevertheless those are notoriusly very difficult to create.

As a conclusion Blockchain remains an undiscovered powerful tool that provides a lot of opportunities but at the same time much more complex systems to develop. Over time and as circumstances change, blockchain incentive design needs public policy and scientists to work hand by hand to create a long-term sustainable model.

What is blockchain from cryptoeconomics perspective? was originally published in Data Driven Investor on Medium, where people are continuing the conversation by highlighting and responding to this story.