Crypto economics makes it unaffordable to behave bad
Modern cryptography using computers allows for affordable and easily repeatable encryption that allows for widespread adoption and new methods of encryption to be built on top of each other. Initially used during WWII for sending messages between members of armed forces, today encryption allows civilians to take advantage of it for everyday purposes.
For the sake of getting to the point, I will jump ahead to blockchain encryption and the implementation of crypto economics. Blockchain encryption implementation varies depending on the blockchain network being referred to. In a blockchain like Bitcoin, there are various methods of encryption employed to assure that the network runs in the manner intended and it continues to sustain itself for the sake of those that depend on it. Key examples of services that individuals can rely on are accurate account balances, immutable history of transactions and deployed code on the blockchain that only obeys itself and can be designed to have no owner.
One method of encryption is building the public address that everyone else on the network can see for the purpose of sending, receiving and reviewing other’s interactions with the blockchain. Public addresses not only represent accounts for individuals, they also are formed to represent transactions and contracts made up of software code (in the case of the Ethereum blockchain and ones like it). Public addresses are formed through the combination (hash) of a person’s private key and the information that shows what transaction this person is looking to complete. Hashing is commonly employed in blockchain encryption to produce addresses which can be used as a reference to look up people and contract states and balances, transactions that have occurred, and blockchain blocks of the past. The point of a public address is to be added to the public ledger that is the blockchain and show what accounts have sent what amounts to which other accounts. Inside a traditional bank, this is similar to how the bank updates it’s internal ledgers to show which accounts have less in them and which have more. The big difference is that the bank has its one ledger which it keeps to itself while its customers and regulators need to trust it, while users of a blockchain can all hold a ledger and verify it themselves using verification algorithms.
The purpose of cryptography and the software behind the blockchain virtual machine is to check the address created for the transaction to verify whether the transactions is legitimate. Due to the way the virtual machine (a term used to describe the entire system of computers running on the blockchain’s protocol) is built, if someone makes up transactions, for example to send transactions from accounts they don’t own or send out multiple transactions for the same money, the checking mechanisms will catch it and reject it. These checking mechanisms will refuse to add it to the overall ledger and it will not become part of the blockchain’s history. This feature is part of an overall aspect of blockchain in which all the information involved in transactions, accounts, and contracts are packaged into hashes and verified through the protocol that is the blockchain.
What this means for people interested in using this for real world applications is that once they agree to something encoded on the blockchain, this cannot be reverted. Today’s enforcement is backed up by human beings that can decide to strong arm or lie to one another if it’s in their own interest to do so. This protocol manages what is considered the truth on the blockchain so that humans that want to work with each other can be confident that what they initially agreed to will happen. At the same time, the ecosystem of transactions, accounts, and contracts can be open for anyone to see since everything is transferred cryptographically. Being transferred cryptographically only protects the information from not being intercepted on its way to its intended destination and being changed by someone after the transaction has been signed off on. This is a relatively easy to understand summary of what symmetric key cryptography allows; keep in mind this is also used widely in other applications like email.
To cover here later: public addresses and preimage resistance, transactions, the blockchain and its immutability, hashcash function and SHA256, proof of work and deterministic nature, avoiding double spending, consensus, smart contracts.
Crypto economics is based on the pursuit of nash equilibrium in the network. Nash equilibrium is the state where all parties are aware of the equilibrium state of the other parties but have no incentive to change their strategy. This allows for all parties involved in the network to see what transactions are occurring and balances of addresses that individuals hold without realistically being able to conduct an attack on them and break the agreed-to rules.
