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Underlying every blockchain project/design is the use of cryptoeconomic principles. Cryptoeconomics is the secret ingredient required in order for open, decentralized, secure, neutral, and distributed networks to function properly.
Cryptoeconomics as a field is still in its very early stages, but lately the concept of token design has become important, especially since the advent of ICOs, many have now realized how important the definition of the purpose of the token is. Note that token design is essentially about combining mechanism design and economic incentives, we will discuss more on this later. Cryptoeconomics is thus about securing networks with the help of economic incentives.
In general, it is fair to say that if the objective is to work out robust designs for decentralized economic networks and building working ecosystems around blockchain based infrastructure, then cryptoeconomics is the first set of tools you will want to learn.
Below is a formal definition of cryptoeconomics.
A formal discipline that studies protocols that govern the production, distribution and consumption of goods and services in a decentralized digital economy. Cryptoeconomics is a practical science that focuses on the design and characterization of these protocols. Vlad Zamfir [Ethereum Foundation]
The key part is about building an actual decentralized digital economy. You need a million things to achieve that, but only a few fundamental components will be enough to start with.
- Prove things that happened in the past, i.e cryptography.
- Incentivise people to participate, i.e game theory.
"Cryptoeconomics makes use of cryptography and game theory to design and characterize protocols" means that cryptoeconomic protocols are usually reverse-engineered games: you know the results (what you want to happen in your newly created digital economy – this is also known as desirable outcome) and you create the right set of rules of a game that will adequately incentivize people to participate. Whatever the rules of the game, participants will – amongst other things – base their actions on non-arguable events that happened in the past and for that we use cryptographic proofs.
For designers, the difficulty of cryptoeconomics lies in two major areas: the design of the rules of the game and the understanding of the underlying technical components that will make the design a functional reality as intended. In the next sections, you will find directions to navigate the complex field of cryptoeconomics.
Alice wants to send a message to Bob
In a distributed network where there's no central authority, there's no one to make sure that Alice did send the message or that Bob did receive it. Put differently, you can't tell the difference between these 2 statements:
- Alice fails to send a message to Bob
- Bob fails to report Alice's successfully sent message
If this is the game then there are several strategies both players can employ: Alice and Bob can respectively tell the truth or lie regarding sending and receiving the message. Therefore to inform the network about the success or failure of Alice sending a message to Bob, there must be an incentive toward telling the truth. This is where cryptoeconomics kicks in.
Vlad Zamfir's Lecture: Casper the Friendly Sharded Blockchain & What is Cryptoeconomics