Cryptoeconomics is a portmanteau word made of the two words – “cryptography” and “economics”. If one wishes to understand how blockchain technology works, one needs to familiarize themselves with cryptoeconomics. Cryptoeconomics refers to a framework where economics interacts with cryptography. The cryptography is responsible for securing the communications over this network. The economic aspect ensures that the network functions in the desired manner without any hindrances.
Blockchain cannot become the decentralized network it aspires to be without a stable cryptoeconomics in place that thwarts attacks by malicious infiltrators.
The Role of Cryptoeconomics in De-centralized Blockchain
Cryptoeconomic principles facilitate a consensus between the involved parties without the need for a central authority. If this agreement was not reached, decentralized blockchain networks like Ethereum and Bitcoin would simple not work. Cryptography and economic incentives drive the development of a decentralized network and their ability to reach a middle ground regarding the state of the blockchain.
Cryptoeconomics stakes claim to the ambitious task of trying to combine technically implemented rules with unpredictable human behavior. Building incentive mechanisms into such a decentralized system becomes quite difficult.
It is unfair to compare traditional economics with cryptoeconomics as economics has been revised and subject to evolution over ages, cryptoeceonomics on the other hand necessitates construction from ground zero. It involves being able to predict how people will interact with this completely new system of payment and design rules governing the use accordingly.
Cryptoeconomics becomes complicated here as we aren’t really used to designing economic systems from scratch. We’ve always adopted the one handed over to us by our forefathers and manipulated it to suit contemporary times. Never before have we built a completely new economic system from nothing. Also, predicting human behavior is no easy task.
The need of the hour is improvisation. Yet, these rules need to be well-defined for a decentralized system to hold its own and not crumble in the face of pressure. Mechanism design i.e. a crucial subset of economics can be employed here to incentivize/disincentivize behavior in line with the system.
Use of Tokens
A token is used as a tool to regulate the micro-economy of an enterprise. If a system has been designed well, it conveniently manages the distribution and incentivization of these tokens. If incentivized tokens can be used optimally it aids the overall growth and well-being of a decentralized network. It is important to note that ICOs are beginning to replace the importance of tokens more and more in the current system.
Gustavo Fonseca loves anything digital and crypto-related which makes him sit up and pay attention. He got into the world of digital marketing and business digital transformation career in 2010. Some time later he got into Crypto, a dynamically developing segment at the intersection of the financial services and technology. Gustavo joined TheDailyCoins in September 2018.