Making Sense of “Cryptoeconomics”
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Making Sense of “Cryptoeconomics”
By Josh Stark
Posted November 16, 2017
The Roman Aqueduct at Segovia, an early marvel of engineering
A few months ago Parker Thompson, a well known Silicon Valley VC, tweeted that “the concept of crypto-economics is stupid. It’s economics. Inventing your own word is just an excuse to ignore well-understood concepts.”
The term “cryptoeconomics” causes a lot of confusion. People are often unclear on what it is supposed to mean. The word itself can be misleading, as it suggests that there is a parallel “crypto” version of the whole of economics. This is wrong, and Parker is right to mock such a generalization.
In simple terms, cryptoeconomics is the use of incentives and cryptography to design new kinds of systems, applications, and networks.Cryptoeconomics is specifically about building things, and has most in common with mechanism design — an area of mathematics and economic theory.
Cryptoeconomics is not a subfield of economics, but rather an area of applied cryptography that takes economic incentives and economic theory into account. Bitcoin, ethereum, zcash and all other public blockchains are products of cryptoeconomics.
Cryptoeconomics is what makes blockchains interesting, what makes them different from other technologies. As a result of Satoshi’s white paper, we have learned that through the clever combination of cryptography, networking theory, computer science and economic incentives we can buildnew kinds of technologies. These new cryptoeconomic systems can accomplish things that these disciplines could not achieve on their own. Blockchains are just one product of this new practical science.
This article aims to explain cryptoeconomics in clear, simple terms. First, we examine bitcoin as an example of cryptoeconomic design. Second, we consider how cryptoeconomics relates to economic theory in general. Third, we look at three different areas of cryptoeconomic design and research that are active today.