Cryptoeconomics for Dummies Part 0



It would probably be also correct to call this post Cryptoeconomics for Dummies by Dummies. There will be a fair amount of simplification. I decided to write this post because in the years of an academic, I would probably be preparing a undegrad thesis right now. But I’m not an academic and, as far as I’m aware, there’s no such a thing as a cryptoeconomics undegrad program. (If you know of or want to start a cryptoeconomics undergrad program, I’m in — please, ping me on Twitter)

At the moment, pretty much everyone is a beginner in cryptoeconomics. But some are more beginners than others.

End of 2015 Ethereum core dev, researcher and a self proclaimed troll Vlad Zamfir gave a talk about cryptoeconomics and so far it had about 600 views. Watch it to become less of a beginner. Vlad is working on Casper PoS algorithm together with Vitalik Buterin & other researchers. Cryptoeconomics are pretty useful to figure out the algo itself. It is useful also for everyone who wants to design & implement systems with some degree of autonomy which don’t rely on just one entity.

“Practice safe design of protocols and systems without centralised ownership — practice cryptoeconomics”

Vanilla cryptoeconomics

Cryptoeconomics come in different flavours. There will be more and more flavours of it in the coming year, as the term will be getting popularised, gets its own page on Wikipedia, gets watered down & defined and re-defined and is made great again in rare dank memes.

Right now Vlad Zamfir defined it as:

“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.”

There is even a shorter and little bit darker (which I like) definition on the Ethereum wiki:

“the study of economic interaction in an adversarial environment”

I’ll try to formulate it, in my own words, what it does (POSIWID) and make it a little bit more dark.

“One of the things it does is helping to design a system of incentives and counterincentives in a way that when this system is implemented without any central authority to keep it in check it doesn’t all go to shit.” It is called crypto because the underlying protocols you build this system on use cryptography, not because it is cryptic”

If you design an autonomous economy that you want to implement it on Ethereum you use cryptoeconomics for that. It is useful because it involves both: social and technological sides and interactions, and it is also quite soothing because when you deal with cryptoeconomics you can take a rest from social/technological dichotomy.

Cryptoeconomics is very much about game theory. It is very much about the fact that not everyone is nice. It doesn’t say that everyone is not nice. Last week Vitalik in his “Introduction to Cryptoeconomics” presentation mentioned that it is ok to say that at least 15% of the network is probably honest. As far as I get it, 15% might not be nice, but at least it is ok to assume that they are not total jerks.

When not to use cryptoeconomics?

“Do not use cryptoeconomics at home. Same as blockchains. If you have a houshold that needs cryptoeconomics, move out.”

I wouldn’t recommend to use cryptoeconomics to design communication protocols with your friends. You might use it to design a communication protocol with your partner, but it probably means you’re relationship is getting nowhere, just find another partner or be single for a while. Normally, cryptoeconomics are used to replace trust in the situations where trust no longer scales, in hostile environments where everyone wants to crew each other over.

Other possible ways of wrap your head around cryptoeconomics

Apart from game theory I also find it easier to view cryptoeconomics though the lens of actor-network theory (ANT) ANT is often associated with the equal treatment of human and non-human actors. ANT assumes that all entities in a network can and should be described in the same terms . It kind of saves you time to think who is a human and who isn’t, and just think of their interactions instead. (Right now humans are often considered more wicked than non-humans but I have no idea why)

Another thing which is a bit helpful (but not to be confused with cryptoeconomics) is cybernetics which is used for exploring regulatory systems — their structures, constraints, and possibilities, defined by Norbert Wiener s “the scientific study of control and communication in the animal and the machine.” While cybernetics mainly obsess about feedback loops but not about decentralisation, and cryptoeconomists are other way around, both fields obsess about autonomous economic and governance systems. It is interesting to see some of the cybernetician’s attempts from the 60s & 70s (such as OGAS in USSR and Cybersyn in Chile) to implement something like that (funny enough a former operations director of Cybersyn project Raul Espejo mentioned during his presentation couple if years ago that what mainly was wrong with Cybersyn is it’s hierarchical structure — central planning applied to participatory democracy)

Hoodo magic — for every hoodoo there is an antihoodo.

Interaction in a shitty environment without relying on a shitty third party

Back to the definitions. Lets call an adversarial environment where our economic interaction takes place a shitty environment, because I like defining and explaining stuff by imagining different attack vectors. And this is my second favourite flavour of cryptoeconomics after wicked dystopian cryptoeconomics (that I will write about some other day). So you use cryptoeconomics to figure out how to build a system that is maintained by their participants, either humans or machines or other, and to make fatal attacks on your autonomous system nearly impossible.

As far as I get it, most of the time you would design it in a way where attacks are just bloody expensive (but not always). And you make sure that honest & useful participation is rewarded. So it makes more sense to play nice. It kind of works if you assume that all your actors are rational. But you should do better than that. I wasn’t sure, so I asked Vitalik Buterin whether cryptoeconomics assume that all the actors are rational and he said no. I’m yet to research and wrap my head around how to deal with non rational actors in cryptoeconomics, but I’ll keep for the part one. It just means that cryptoeconomics is more than just a decentralised system of sticks and carrots. This is just one basic flavour.

Stick, carrot, carrot on a stick. Carrot on a carrot on a stick on a carrot on a stick.

Lets stick to vanilla cryptoeconomics, first scrap all the crypto speak from it, assume we have a lot of rational actors and see what decentralised communication protocols we can be built with sticks and carrots. You can build The Incredible Machine out of just sticks and carrots.

“Size of sticks an carrots matters”

Someone told me a story the other day about how to attack a country’s communication infrastructure — you start buying copper on the border of this country at a ridiculously high price, and wait till the citizens of the country dig out all the copper cables and sell it to you. In the end you will end up with heaps of copper that you don’t need and spend a lot of money, but it might be cheaper than other attacks. Ok, you will need to buy optical fiber cable too.

(Another dumb example is to think about democracy with decisions by majority voting as a legitimised 51% attack, but that’s also in collapsitarian cryptoeconomics)

Ok, those example don’t have any crypto in it. But it doesn’t really matter for this post. Last weekend my team mates and I were chatting about one minor cryptoeconomic issue, and in that context we just used cows:

A cow gives milk, so rational actors wont kill it because it’s useful, but if this cow also huge and tasty looking, someone might want to eat it. You know what, I would totally eat it, cuz I rather have a steak now and figure out what to eat next than drink milk till I die. Yuck, milk.

If you genetically modify your cow to taste awful then it will be less likely I attack your cow.

If you genetically modify your cow to taste like canned spinach or cold pasta I wont touch it with a barge-pole. I rather have a glass of warm milk (for the rest of my life).

But you can be pretty sure that some crazy individual who loves cold pasta will kill and eat your cow.

Or someone who hates cows.

Or someone who hates cows so much that is prepared to pay all those people who love milk so much so much money that they would help him to kill this poor cow. Start the whole cow assassination market.

To counteract that you can make sure that some fierce milk addict vegetarians participate in the system and they will start an assassination market for all meat eaters if something happens to the cow.

It’s just one tiny example of incentives & counter incentives issue and I can go on forever (We did figure something out in that particular use case)

When it comes down to decentralised systems and protocols it matters, because you don’t have a trusted dude who looks after the cow and you buy milk form him. Because what if this dude is not trusted and decides to eat the entire cow by himself. This stuff happens all the time, so you just want to build an unstoppable global multiuser cow here without central authority, nothing else.

This stuff matters in decentralised systems, because what we’re trying to do here is to get rid of a third party which will supposedly make sure that the system doesn’t go to shit. I just quote some infosec dude:

“there is no such a thing as a trusted 3rd party”

(don’t recall whom I heard it from exactly)

Cryptoeconomics is more than just incentives and counterincentives, because sticks and carrots would work for rational actors only. Lets not assume everyone is rational, even squirrels are not rational. But I think one flavour — incentives / counterincentives and resilience to attacks is enough for this post.

Here is a fork of a previous quote with a minor modification:

“In cryptoeconomics there might be such thing as a happy 3rd party and a scared 3rd party”

“Happy” as in “incentivised”. But who knows what makes those irrational people happy. Thanx bai

PS. If you came across some decent articles about this topic, please share. Even better if it’s not written by the usual suspects. There is a subreddit about it but it’s a bit dead.

In the next parts I’m also planning to write not just about the dangers/attacks in this area, bit about the dangers of this area itself —Decentralised Ubiquitous Totalitarianism for Dummies or Cybernetic Totalitarianism (already a popular topic in dystopian sci-fi under different names and that enjoy a lot). In there I will fiercely argue and rant that making it decentralised wouldn’t make it immune from Orwellian. There is also a fun article by Buterin here. If you’re interested in dystopian cryptoeconomics, please, ping me on Twitter, or even better how about I buy you a beer.

ping me&I tell you

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store