If we consider economics itself, one of the most reliable sources says that economics means the social science that studies the production, distribution, and consumption of goods and services. In case we combine economics with cryptography, we are to get cryptoeconomics in the end. Cryptoeconomics helps correlate the behavior of network users in this way.
Additionally, cryptoeconomics is eager to overcome all possible issues concerning the coordination of participants in the sphere of the digital world. It is done with the help of cryptography as well as economic reasons.
In case we are going to create a decentralized network, we should think about cryptoeconomics. The matter is that it gives a way in order to align participants’ reasons. Moreover, there will be no necessity for a third party.
Of course, cryptoeconomics is not just ordinary economics. We can say for sure that cryptoeconomics includes game theory (what is so exciting!), mathematics as well as design. It consists of various methodologies in the economics world. If you want to deal with it, you should understand the principles of its work, features and design.
So, use your power and brain to the fullest and try to guess how to make funds, develop and design the world of decentralized networks. Our article will help you achieve this goal.
What problems does cryptoeconomics solve?
Long time ago, when trees were so high and the sun was shining brightly, it was thought that there was no possibility of creating a peer-to-peer network. Moreover, there was no chance to make consensus avoiding important intrusions to attacks and issues.
Have you ever heard of the Byzantine General’s Problem? Oh, this is a very important fact to know. The problem is a sort of dilemma. It shows how it is important and significant for various parts to make an agreement. Actors, unfortunately, can be very unreliable and, in turn, agreements will be failed. In this case, we can never see the network that fulfills its functions.
Afterwards, there was a creation of Bitcoin that helped to overcome these difficulties. And since then a great time for decentralized networks began. It became marvelous for decentralized networks to make consensus taking into consideration the history of the network. Fortunately, there was an appearance of safe and reliable decentralized networks that are good for everybody interested in them.
Cryptoeconomics & Bitcoin mining
We all know that a creation of a network that allows reliable and trustworthy transfer is one of the Bitcoin goals. Moreover, it should be censorship-resistant. It all can be achieved during mining. In these circumstances, miners get rewards in bitcoin if they verify a block of transactions. It helps miners to behave in a polite and honest way. Consequently, each network can become reliable and very safe.
You should be a great mathematician because mining insists on solving a lot of mathematical issues, which deal with a cryptographic hash algorithm. Why do we use hashes? They help us combine every block with the next one and give an opportunity to make a record of transactions. These transactions are called blockchains.
Miners also should solve some computational issues. One of the most important rules is that bitcoin can be spent in the case if a true digital signature is obtained from private keys. It is the Bitcoin network that makes these rules. That is why the network becomes safe and reliable, fortunately.
In what way does cryptoeconomics increase Bitcoin’s security?
Majority rule is something that goes around Bitcoin’s security method. Unfortunately, spiteful actors can govern the blockchain in the future. It is done by obtaining control of the majority of the network’s computing power. In such a situation, the spiteful actors can potentially avoid some transactions from getting confirmations. What is more, transactions can go nowhere. Do not panic, please, because these methods can be very expensive: a lot of electricity is used in these situations.
You know, Bitcoin is so popular because it met cryptoeconomics and they made friends. It became popular among a lot of participants and even classes of the network.
The rule says: no hardness of the cryptographic protocol, no secure unit of account. In addition, this account is necessary in order to give miners a reward. Without this, it becomes impossible.
So, when we take such ingredients as the Bitcoin network and miners, we will get a tasty dish called ‘Confidence with Safety’.
The cryptoeconomic circle
The cryptoeconomic circle is a very interesting thing. It is a three-sided market between miners, users as well as investing parties. In other words they are named as the supply side, the demand side and the capital side. We should mention that every part of this circle can and should exchange values among them. In this case they will use a token (a scarce cryptoeconomic resource, in other words).
For instance, miners will get tokens with the help of users if they work well. The network’s consensus protocol makes the process really standard and reliable. The main goal of cryptoeconomic is to control and rule when and in what way miners can get reward.
What about investing in this situation?
Well, it's a dual role. They give liquidity for the miners in order to sell the tokens and capitalize the network with the support of token prices. It should be noted that investing parties can be of two kinds. The first one is traders and the second one is hodlers. The first ones are investors for a short period of time and the latter ones are investors for a long period of time.
So, to begin with, traders make liquidity for the token. In this case miners can sell their tokens and cover all necessary costs. Holders can capitalize the network so that it grows and increases. For sure, all parties in this circle depend on each other. This is fair, of course.
Of course, cryptoeconomics is a very new science. It was born with the Bitcoin epoch. Nevertheless, it became a very important building block to keep in mind while making and creating decentralized networks.
With the help of isolating the various roles in cryptoeconomic models we can compare costs, incentives in every participant group. We are able to think of its power, strength and possibility. We can understand the points of centralization in the future. In this case we will be able to create a great balanced governance and token distribution models.
So, if you are thinking about the development of networks in the future, please, pay attention to cryptoeconomics sphere. Make your own life more interesting, efficient and tasty!