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What is Cryptoeconomics? The Ultimate Beginners Guide
What is cryptoeconomics? Ethereum developer Vlad Zamfir says that cryptoeconomics is:
“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.”
The blockchain technology runs on the principles of cryptoeconomics.
Let’s break it down. Cryptoeconomics comes from two words: Cryptography and Economics. People tend to forget the “economics” part of this equation and that is the part that gives the blockchain its unique capabilities. The blockchain wasn’t the first time that a decentralized peer-to-peer system was used, torrent sites have used it for ages to share files. However, in every sense of the word, it has been a failure.
Why was peer-to-peer file sharing a failure?
In a torrent system, anyone can share their file with a decentralized network. The idea was that people would download them and keep seeding aka sharing the file with the network for others to download. The problem was that this worked on an honor system. If you were downloading a file, then you were expected to seed as well. The problem is that humans are not really the most honorable of creatures and without any economic incentives it made no sense for people to keep seeding a file which took up unnecessary space in their computers.
Satoshi Nakamoto and the blockchain technology
In October 2008, an unknown man/woman/group calling themselves Satoshi Nakomoto released a paper which would lay the foundation for bitcoin. This would shake the online community to its very foundations, for the first time we had a working model for something based in cryptoeconomics. The way it differed from earlier p2p decentralized systems, was that people now actually had an economic incentive to “follow the rules”. But more than that, the true genius of the blockchain technology lied in how it circumvented the Byzantine General’s Problem to create a perfect consensus system (more on that later).
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