• Sun. Jun 26th, 2022

Cryptoeconomics and its Application

ByArtel Great

May 16, 2022

What is cryptoeconomics?

The term crypto-economics is derived from cryptography and economics.The purpose was to build a methodology for building systems that try to guarantee some kind of data or information security properties and the distribution of goods and services in new digital economies.

Definition

By definition, the combination of stimulants and cryptography to build systems, applications and networks is called Crypto-Economics. It is an emergent field that draws on ideas and concepts of economics and related discipline in the design of peer-to-peer cryptographic systems.

Scope and focus

The basic areas of its scope and focus are as follows

 

  • Mechanism design

Focuses on the use of incentives for behavioural engineering.

  • Token engineering

Focuses on the functionalities and properties exhibited by tokens.

  • Market design

Focuses on employing blockchain protocols and tokens.

How is it related to economics in general?

Mechanism design is a discipline linked to game theory in which the purpose is to find out the best possible strategy for the player. Similarly Crypto Economics is concerned with the creation and design of systems. Economic theory is used to build rules or procedures to bring out results.

Purpose of cryptoeconomics:

Before the Introduction of Bitcoin, it was assumed that establishing a peer to peer network that is free from all the vulnerabilities to attack was impossible. But this challenge was solved after the introduction of economic incentives to a peer to peer network that is the introduction of bitcoin, which made cryptography reliable to reach consensus on the network’s current state and history. The combination of economic incentives and cryptographic protocols have created a new ecosystem of secure decentralised systems.

 

Cryptoeconomics application

 

  • The underlying blockchain provides a monetary unit for creating incentives and penalties.
  • It helps in making a toolset for creating conditional logic in the form of smart contract code.
  • The prediction market uses strategies and allows users to define alternative methods for detecting proper results.
  • Cryptoeconomic designs can be found in the applications created by these tools.
  • Token sales or ICOs are also designed using cryptoeconomics.

Cryptoeconomics and Bitcoin

Cryptoeconomics is one of the reasons for bitcoin’s success.  The security of bitcoin is very risky and can be attacked. The attackers can block new transactions from being verified and confirmed or can even reverse the entire  transactions. Getting this issue solved would be very expensive because mining machines need a lot of electric energy and major hardwares.

There is no security unit  to compensate miners without the cryptographic technology. The history of the transaction could not be verified without the miners. The combination of  Bitcoin and miners promote reliability according to the crypto economic theories.

Conclusion

Cryptoeconomics  is a relatively new concept that developed with the introduction of Bitcoin. It acts as an important building component with their decentralised networks

Cryptoeconomics is an important building component to consider when creating decentralised networks, while being a relatively new idea that developed with the launch of bitcoin. Crypto Economic models can be helpful in the future for making more resilient decentralised economies as they have been previously tested.