Jump Genesis: Cryptoeconomics
Only the basics
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This article is short overview written for Jump Genesis, an upcoming blockchain event hosted by Jump Trading and Founders.
Why is Cryptoeconomics important?
Bitcoin actually works!
That in itself is a technological marvel. A currency running without a central bank with a market cap of 100+ Billion USD. When Satoshi Nakamoto published the Bitcoin white paper in 2008, many claimed it to be a failure (Bitcoin Obituaries) because it was unclear whether the economic incentives and cryptography would actually hold up to real life human behavior — the unproved field of cryptoeconomics had not yet been born.
Just like Galileo is known as the founding father of physics, Satoshi will forever be known as the founding father of cryptoeconomics
More and more, developers, policy makers, economists, and citizens are realizing the positive implications decentralized economies can bring. This has led to massive development in new cryptocurrencies, new tokens, new startups, and new fields of study to help explain the current and build the future. Cryptoeconomics will one day become a crucial disciple that will guide the development of future applications, protocols, and systems of organization.
But what is it? In this article, we’ll go over:
- Definitions of Cryptoeconomics
- Basics of Token Design
- Where to learn more.
What is Cryptoeconomics?
The study of cryptoeconomics has been the backbone of the modern cryptocurrency world since 2008, and will continue being so for the foreseeable future.
We can now write code that governs social order, organization, incentives, security.
There are two definitions of Cryptoeconomics that I like:
Cryptoeconomics is the use of incentives and cryptography to design new kinds of systems, applications, and networks. — source
And
Cryptoeconomics is the study of mechanism design using cryptographically secure incentive distribution — source
Cryptoeconomics is inherently a cross-disciplinary field spanning topics of cryptography, economic incentives, blockchain, network theory, game theory, and computer science.
Bitcoin succeeded where other decentralized protocols failed because it incorporated cryptoeconomics at the core of its consensus protocol. The grand vision of cryptoeconomics is to extrapolate this success to embed cryptoeconomic incentives into everything — computation, transactions, storage, prediction, power.
Cryptoeconomics in the wild
Token design
The core mindset of a token designer is to create incentives so that individuals behave in certain desirable ways that perpetuate the system. For example, the basics of building a decentralized cloud storage network will be to incentivize people to join the system /download the software / add value to the network with certain amounts of ‘tokens’.
The three main tokens in use are utility tokens, security tokens, and equity tokens.
Utility tokens
Utility tokens provide users with access to a particular product or service. In the above example of decentralized cloud storage, Filecoin–which raised an ICO-record of 257 Million, will take advantage of unused computer hard drive space. ICO contributors received tokens will be able to purchase storage space from Filecoin, which then will trickle down to the users who host that storage space.
This distinguishes Utility tokens from the vast majority of investment-driven security tokens that are subject to more regulatory scrutiny and securities regulation.
Security token
A security is a broad classification that refers to any kind of tradable asset. Tokens backed by real estate, coins redeemable for precious metals, are all examples of security tokens. The basic regulatory definition is “if there is an expectation of profit, primarily from the efforts of others”.
Issuing security tokens according to the regulations is sometimes easier and cheaper for some projects than launching token sale offering utility tokens due to the reduction of legal risk. But security tokens are regulated, and thus limited on who can invest in them and how they can be traded.
Equity tokens
Equity tokens are an emerging application of Ethereum-based smart contracts. They give startups the potential to issue stock in the company (equity tokens) through initial coin offerings (ICOs). Equity tokens make stock trading more accessible to the average investor and allow shareholder to take a more active role in corporate governance.
More at Genesis
There are many more applications of cryptoeconomics such as decentralized governance, differences between proof-of-work vs proof-of-stake, and even incentivization of developers for open source decentralized projects. Come to Genesis to learn more!
How to learn Cryptoeconomics
- Start with a deep understanding of human decision making from a behavioral and economic standpoint.
- Apply blockchain knowledge to design robust decentralized systems.
Research into game theory / mechanism design.
MIT Open Courseware on Game Theory
Vitalik Buterin’s (Ethereum Founder) lectures.
Read articles/books about mechanism design.
Understand people.
Read books like Predictably Irrational.
Understand that people sometimes behave in irrational ways.
Apply basic economic concepts like loss aversion, supply+demand, game theory.
Learn basics of blockchain development
Understand how Solidity, the leading contract-oriented programming language for writing smart contracts, works.
Understand differences between current limitations and future possibilities.
Read white papers
Visit CoinMarketCap.com for a list, and Google search the top cryptocurrencies followed by the words “white paper”.
Find the core cryptoeconomic concepts in each. ⌘+F to find “Incentives”
