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Parker Thompson, a famous Silicon Valley VC, said in a tweet that crypto economics concept is stupid and that it is just economics. He added that inventing a word is trying to ignore understood facts.
The term “cryptoeconomics” has caused confusion, and users won’t understand the definition. This confusion can be excused since the term itself is misleading, and it suggests there is a different “crypto” version of economics. This is untrue, and Parker cannot be blamed for mocking the generalization.
To define it simply, cryptoeconomics is the usage of cryptography and incentives to create new types of systems, networks, and applications. Precisely, cryptoeconomics is about building things and is more similar to mechanical design. It should be noted that cryptoeconomics is not a sub domain of economics. Bitcoins, Ethereum, and the other public blockchains are crypto economic models.
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BITCOIN INNOVATION allows users who do not know each other to reliably reach a common ground between Bitcoin and blockchain. This has been achieved by combining basic cryptographic tools and economic incentives.
Bitcoin design depends on economic incentives and costs. Miners support the network with their electricity and hardware, also earning Bitcoin in return. If mining were cheap, launching a 51% attack would be easy, and if it did not come with an award, people would not contribute to the network with their electricity and expensive hardware.
Cryptoeconomics does not compare to economics as a whole—it has nothing to do with the application of micro economic and macroeconomic concepts to cryptocurrency.
Cryptoeconomics is akin to mechanism design, an area related to the game theory. Game theory focuses on a strategic interaction (game) and tries to find out the perfect strategy for each player. Mechanism design is a reverse game theory as you will need to come up with the desired outcome and then work to create a game in which, if players acted in their own interest, they would achieve that desired result.
Cryptoeconomics also focuses on creating and designing systems just like in mechanism design. However, in this case, the tools for creating economic incentives are founded using software and cryptography and the systems being designed are often decentralized or distributed. This is how Bitcoin was created. Satoshi intended to create a system that had its desired properties.
1. Consensus Protocols: blockchains can achieve a strong consensus without depending on a central trusted party.
2. Cryptoeconomic application design: after solving the core issue of blockchain consensus, it is possible to create applications that “sit on top” of a blockchain such as Ethereum. The underlying blockchain provides; a unit of value for creating penalties and incentives and a toolkit for designing conditional logic in the form of “smart contract code.” The resulting applications are products of crypto economic design.
3. State Channels: cryptoeconomics also involves the creation of smaller sets of interactions among individuals. State channels are a great example. Although not an application, state channels have a valuable technique that blockchain applications can use to be more efficient.
Understanding blockchain environment through cryptoeconomics is useful. It will shed some light on the controversies and debates in the industry.