Foundations of Cryptoeconomic Systems in a Nutshell
This article was updated in Feb 2021 since the original working paper from 2019 was finalised and updated in 2020 (final version). The final version contains two new sections (4) Institutional Economics Perspective and (10.3.) Incomplete Contracts as well as minor updates in the text.
Michael Zargham and I recently published this pre-print of our working paper on the Foundations of Cryptoeconomic Systems. We explore the foundational aspects of cryptoeconomic systems and outline further arches of applied and theoretical research that we think are necessary to do justice to the nature of these complex cryptoeconomic systems.
In the paper we outline that:
- The term “Cryptoeconomics” is underdefined possibly because it is often used in different contexts, which contributes to regular breakdowns in communication. We provide a multiscale definition of the term that builds on the assumption that these systems are in fact:
- Complex socio-economic systems that have properties such as emergence, nonlinearity, adaptation, spontaneous order, and feedback loops that require, amongst others:
- Interdisciplinary research and development, where each discipline deals with the question of resource allocation in these socio-economic networks from a different perspective.
The interdisciplinary approach narrowed to the scope of economics brings the institutional perspective to the forefront:
- Institutional economics is a subset of economics that intersects with political science, sociology, history, management science and cybernetics which studies the role of formal or informal — and public or private institutions– that are represented by a set of rules, norms, procedure, convention, arrangement, traditions or customs to steersocioeconomic interactions. Governments, markets, firms, physical infrastructure, and even social patterns such as marriage are institutions. We describe how cryptoeconomic networks enable more fluid organizations to formalize over the Internet — around a specificeconomic, political, or social purpose — commonly referred to as a “Decentralized Autonomous Organizations”or “DAOs” .
- In the paper we also give a multiscale perspective on these cryptoeconomic systems dividing them in to a micro, meso and macro level where we explain that microeconomic foundations and macroeconomic context together form the basis of a multi-scale model required to capture interscale effects common in complex economic systems.
- Cryptoeconomic networks like the Bitcoin network furthermore need a network science perspective, as they consist of three interconnected networks: (i) the computation and communication network comprised of nodes that leverage a peer-to-peer protocol to validate transactions by mining new blocks, (ii) the financial network comprised of Bitcoin addresses which may sign transactions and transfer funds, and the (iii) the off-chain socioeconomic network representing people and organizations that control the tokens in the financial network and operate those nodes in the computation and communication network. The size of these networks and their interconnectedness adds to the layers of complexity of the systems they respresent.
- We explain why the economics perspective in cryptoeconomics is still underdeveloped. Analyzing existing research on the “evolution of cooperation”, for example, we conclude that the assumptions on the behavior of cryptoeconoic systems’ agents, on which current consensus protocols build, are too simplistic and fail to represent the current state of research on cooperative behavior in multi-agent networks.
- Last but not least we describe Tokens as atomic unit of system state that can make all socio-economic activities visible. We provide a classification into (a) simple token systems, and (b) complex token systems and assume that the speed with which cryptoeconomic systems and their tokenized applications are being deployed, is an indicator for the pervasiveness of the technology and its applications and are the basis for the steering of these data-driven economies.
The last chapter outlines further research and briefly introduces the context and importance of selected research arches:
- Purpose-driven tokens
- Data driven economic systems
- Incomplete Contracts
- Ethics and governance of decision algorithms in social systems
- Cyberphysical systems engineering
- Computational social science
Challenges writing this paper
Given the fact that cryptoeconomics is an interdisciplinary science our greatest challenge when writing this paper was language and context, especially since we tried to write this paper for a wide array of disciplines. How to provide a breadth and depth of the field in a few pages without seeming to shallow? How to find a common language, without having to define every single term? How to not state the obvious for people from certain disciplines while providing enough context and explanation to readers from other disciplines?
Before the paper
This paper is an output of a heuristic and exploratory research phase that I started early 2018 when we launched the Research Institut for Cryptoeconomics together with Alfred Taudes at the Vienna University of Economics. It also builds on 3 years of activities at BlockchainHub in Berlin. The paper is furthermore a synthesis of Michael’s activities building and applied research company Blockscience and all his prior research activities.
My initial research assumptions, when we started the research institute, were outlined in this blog post on the “State of Cryptoeconomics Research”. It took our team a few months to realize that we needed to focus on tokens as the atomic unit of these cryptoeconomic systems. This lead to our activities around the economic engineering of “Purpose-Driven Tokens” which we described in our post on ”Token Engineering Research”, “Token Engineering from an Economic Perspective” and “The Power of Incentives : Token Engineering @ WU Vienna”. This was followed by a series of applied research projects that we have been conducting with institutions like the City of Vienna, Tlabs, the Austrian National Bank, Wien Energie & some blockchain networks and also motivated me to write a book on Token Economy. Writing this book helped me finalize this first exploratory research phase while providing a point of reference that could hopefully be useful for a general audience to understand the technology basics as well as the complexities and magnitude of the socio-economic implications of its tokenized applications.
The paper is the academic synthesis of all the above mentioned activities. It is a starting point for future research, not an endpoint. If you would like to give feedback and input for future research please contact me or Michael Zargham.
Thanks to Jamsheed Shorish for his input on this paper. Thanks also to Krzysztof Paruch, Alfred Taudes, Jakob Hackel and Tatjana Novakovic for their contributions to our applied research activities as well as other associated researchers contributing to the activities of the Research Institut for Cryptoeconomics.
- Foundations of Cryptoeconomic Systems, Michael Zargham & Shermin Voshmgir 2019
- Token Economy, Shermin Voshmgir, 2019
- Personal Research Statement, Michael Zargham, 2019
- Purpose-Driven Tokens, Shermin Voshmgir, 2019
- Network Formation Games, Michael Zargham, 2019
- Non-Equilibrium Dynamics, Michael Zargham, 2019
- The Power of Incentives: Token Engineering @ WU Vienna, Kris Paruch, 2019
- From Nash to Lyapunov, Michael Zargham. 2019
- Token Engineering Research, Shermin Voshmgir, 2018
- Token Engineering from an Economic Perspective, Kris Paruch, 2018
- State of Cryptoeconomics Research, Shermin Voshmgir, 2018