Cryptoeconomics

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Cryptoeconomics is an evolving economic paradigm for a cross-disciplinary approach to the study of digital economies and decentralized finance (DeFi) applications. [1] [2] Cryptoeconomics integrates concepts and principles from traditional economics, cryptography, computer science, and game theory disciplines. [3] Just as traditional economics provides a theoretical foundation for traditional financial (a.k.a., Centralized Finance or CeFi) services, cryptoeconomics provides a theoretical foundation for DeFi services bought and sold via fiat cryptocurrencies, and executed by smart contracts.

Contents

Definitions and goals

The term cryptoeconomics was coined by the Ethereum community during its formative years (2014-2015), [4] but was initially inspired by the application of economic incentives in the original Bitcoin protocol in 2008. [5] Although the phrase is typically attributed to Vitalik Buterin, the earliest public documented usage is a 2015 talk by Vlad Zamfir entitled “What is Cryptoeconomics?” [6] Zamfir's view of cryptoeconomics is relatively broad and academic: “… 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”. Alternatively, in a 2017 talk, Buterin's view is more narrow and pragmatic: “… a methodology for building systems that try to guarantee certain kinds of information security properties”. [7]

According to Binance, the primary goals of cryptoeconomics are to understand how to fund, design, develop, and facilitate the operations of DeFi systems, [8] and to apply economic incentives and penalties to regulate the distribution of goods and services in emerging digital economies.

Cryptoeconomics may be considered an evolution of digital economics, which in turn evolved from traditional economics (commonly divided into microeconomics and macroeconomics). Consequently, traditional economic concepts regarding production, distribution, and consumption of goods and services also apply to cryptoeconomics. For example, these include Adam Smith's three basic laws of economics: Law of Supply and Demand, Law of Self Interest, and Law of Competition. [9] They also include more modern economic concepts, such as fiat money theory and Modern Monetary Theory.

History

The historical roots of cryptoeconomics can be traced to the rise of altcoins, prominent among them the Ethereum project, which in 2015 pioneered the integration of smart contracts into its blockchain, thereby enabling a wide range of DeFi applications.[ citation needed ]

Subdisciplines

Similar to how traditional economics is divided into macroeconomics (regional, national, and international economics) and microeconomics (individual and enterprise economics) subdisciplines, cryptoeconomics can be divided into crypto-macreconomics and crypto-microeconomics subdisciplines.

Crypto-macroeconomics

Crypto-macroeconomics is concerned with the regional, national, and international regulation of cryptocurrencies and DeFi transactions. The Group of Seven governments' interest in cryptocurrencies became evident in August 2014, when the United Kingdom Treasury commissioned a study of cryptocurrencies and their potential role in the UK economy, and issued its final report in January 2021. [10] In June 2021, El Salvador became the first country to accept Bitcoin as legal tender. [11] In August 2021, Cuba followed with a legal resolution to recognize and regulate cryptocurrencies such as Bitcoin. [12] However, in September 2021, the government of China, the single largest market for cryptocurrency, declared all cryptocurrency transactions illegal, completing a crackdown on cryptocurrency that had previously banned the operation of intermediaries and miners within China. [13]

Crypto-microeconomics

Crypto-microeconomics is concerned with the individual and enterprise usages of cryptocurrencies and DeFi transactions. A strong majority of USA adults have heard about major cryptocurrencies (Bitcoin, Ether), and 16% say they personally have invested in, traded, or otherwise used one. [14] More than 300 million people use cryptocurrency worldwide, and approximately 46 million Americans have invested in Bitcoin. [15]

Criticisms and controversies

Bitcoin, along with other cryptocurrencies, has been described as an economic bubble by many economists, including Robert Shiller, [16] Joseph Stiglitz, [17] Richard Thaler, [18] Paul Krugman, [19] and Nouriel Roubini. [20] In addition, Bitcoin and other cryptocurrencies have been criticized for the amount of electricity required for cryptocurrency “mining” (blockchain transaction validation), [21] and for their being used to purchase illegal goods. [22] [23]

See also

Related Research Articles

<span class="mw-page-title-main">Bitcoin</span> Decentralized digital currency

Bitcoin is the first decentralized cryptocurrency. Nodes in the peer-to-peer bitcoin network verify transactions through cryptography and record them in a public distributed ledger, called a blockchain, without central oversight. Consensus between nodes is achieved using a computationally intensive process based on proof of work, called mining, that requires increasing quantities of electricity and guarantees the security of the bitcoin blockchain.

<span class="mw-page-title-main">Cryptocurrency</span> Digital currency not reliant on a central authority

A cryptocurrency, crypto-currency, or crypto is a digital currency designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it.

Litecoin is a decentralized peer-to-peer cryptocurrency and open-source software project released under the MIT/X11 license. Inspired by Bitcoin, Litecoin was among the earliest altcoins, starting in October 2011. In technical details, the Litecoin main chain shares a slightly modified Bitcoin codebase. The practical effects of those codebase differences are lower transaction fees, faster transaction confirmations, and faster mining difficulty retargeting. Due to its underlying similarities to Bitcoin, Litecoin has historically been referred to as the "silver to Bitcoin's gold." In 2022, Litecoin added optional privacy features via soft fork through the MWEB upgrade.

<span class="mw-page-title-main">Dogecoin</span> Cryptocurrency

Dogecoin is a cryptocurrency created by software engineers Billy Markus and Jackson Palmer, who decided to create a payment system as a joke, making fun of the wild speculation in cryptocurrencies at the time. It is considered both the first "meme coin", and more specifically the first "dog coin". Despite its satirical nature, some consider it a legitimate investment prospect. Dogecoin features the face of the Shiba Inu dog from the "doge" meme as its logo and namesake. It was introduced on December 6, 2013, and quickly developed its own online community, reaching a peak market capitalization of over US$85 billion on May 5, 2021. As of 2021, it is the sleeve sponsor of Watford Football Club.

<span class="mw-page-title-main">Vitalik Buterin</span> Canadian programmer (born 1994)

Vitaly Dmitrievich Buterin, better known as Vitalik Buterin, is a Canadian computer programmer and co-founder of Ethereum. Buterin became involved with cryptocurrency early in its inception, co-founding Bitcoin Magazine in 2011. In 2014, Buterin deployed the Ethereum blockchain with Gavin Wood, Charles Hoskinson, Anthony Di Iorio, and Joseph Lubin.

<span class="mw-page-title-main">Ethereum</span> Open-source blockchain computing platform

Ethereum is a decentralized blockchain with smart contract functionality. Ether is the native cryptocurrency of the platform. Among cryptocurrencies, ether is second only to bitcoin in market capitalization. It is open-source software.

A decentralized autonomous organization (DAO), sometimes called a decentralized autonomous corporation (DAC), is an organization managed in whole or in part by decentralized computer program, with voting and finances handled through a blockchain. In general terms, DAOs are member-owned communities without centralized leadership. The precise legal status of this type of business organization is unclear.

A blockchain is a distributed ledger with growing lists of records (blocks) that are securely linked together via cryptographic hashes. Each block contains a cryptographic hash of the previous block, a timestamp, and transaction data. Since each block contains information about the previous block, they effectively form a chain, with each additional block linking to the ones before it. Consequently, blockchain transactions are irreversible in that, once they are recorded, the data in any given block cannot be altered retroactively without altering all subsequent blocks.

A decentralised application is an application that can operate autonomously, typically through the use of smart contracts, that run on a decentralized computing, blockchain or other distributed ledger system. Like traditional applications, DApps provide some function or utility to its users. However, unlike traditional applications, DApps operate without human intervention and are not owned by any one entity, rather DApps distribute tokens that represent ownership. These tokens are distributed according to a programmed algorithm to the users of the system, diluting ownership and control of the DApp. Without any one entity controlling the system, the application is therefore decentralised.

Bitcoin Magazine is one of the original news and print magazine publishers covering Bitcoin and digital currencies. Bitcoin Magazine began publishing in 2012. It was co-founded by Vitalik Buterin, Mihai Alisie, Matthew N. Wright, Vladimir Marchenko, and Vicente S. It is currently owned and operated by BTC Inc in Nashville, Tennessee.

<span class="mw-page-title-main">Cardano (blockchain platform)</span> Public blockchain platform

Cardano is a public blockchain platform. It is open-source and decentralized, with consensus achieved using proof of stake. It can facilitate peer-to-peer transactions with its internal cryptocurrency, ADA.

<span class="mw-page-title-main">Abra (company)</span> Financial services and technology company

Abra is a financial services and technology company that operates a cryptocurrency wallet service including a trading service for buying and selling cryptocurrencies, a service for earning interest on cryptocurrencies and stablecoins, and a lending services for borrowing against cryptocurrency collateral.

A cryptocurrency bubble is a phenomenon where the market increasingly considers the going price of cryptocurrency assets to be inflated against their hypothetical value. The history of cryptocurrency has been marked by several speculative bubbles.

Cryptocurrency and crime describe notable examples of cybercrime related to theft of cryptocurrencies and some methods or security vulnerabilities commonly exploited. Cryptojacking is a form of cybercrime specific to cryptocurrencies that have been used on websites to hijack a victim's resources and use them for hashing and mining cryptocurrency.

Anthony Di Iorio is a Canadian entrepreneur primarily known as a co-founder of Ethereum and an early investor in Bitcoin. Di Iorio is the founder and CEO of the blockchain company Decentral, and the associated Jaxx wallet. He also served as the first chief digital officer of the Toronto Stock Exchange. In February 2018, Forbes estimated his net worth at $750 million–$1 billion.

<span class="mw-page-title-main">MetaMask</span> Software cryptocurrency wallet

MetaMask is a software cryptocurrency wallet used to interact with the Ethereum blockchain. It allows users to access their Ethereum wallet through a browser extension or mobile app, which can then be used to interact with decentralized applications. MetaMask is developed by ConsenSys Software Inc., a blockchain software company focusing on Ethereum-based tools and infrastructure.

<span class="mw-page-title-main">Uniswap</span> Decentralized cryptocurrency exchange

Uniswap is a decentralized cryptocurrency exchange that uses a set of smart contracts to execute trades. It is an open source project and falls into the category of a DeFi product because it uses smart contracts to facilitate trades. The protocol facilitates automated transactions between cryptocurrency tokens on the Ethereum blockchain through the use of smart contracts. As of October 2020, Uniswap was estimated to be the largest decentralized exchange and the fourth-largest cryptocurrency exchange overall by daily trading volume.

Olaf Carlson-Wee is an American entrepreneur and the CEO of cryptocurrency fund Polychain Capital, which he founded in 2016. He was the first employee of Coinbase. Carlson-Wee was named in the Forbes 30 Under 30 list in 2018.

Tokenomics is a term that refers to the study and analysis of the economic aspects of a cryptocurrency or blockchain project, with a particular focus on the design and distribution of its native digital tokens. The term is a portmanteau of words token and economics.

References

  1. ↑ "MIT Cryptoeconomics Lab". MIT Sloan. Archived from the original on 2022-06-22. Retrieved 2022-08-07.
  2. ↑ "Cryptoeconomics - Wikiversity". en.wikiversity.org. Retrieved 2022-08-07.
  3. ↑ Berg, Chris; Davidson, Sinclair; Potts, Jason (2019). Understanding the Blockchain Economy: An Introduction to Institutional Cryptoeconomics. Edward Elgar Publishing. ISBN   978-1-78897-500-1.
  4. ↑ Brekke, Jaya; Alsindi, Wassim (2021). "Cryptoeconomics". Internet Policy Review. 10 (2). doi: 10.14763/2021.2.1553 . S2CID   242297787.
  5. ↑ Nakamoto, S. (2008). "Bitcoin: A Peer-to-Peer Electronic Cash System" (PDF). Bitcoin.org.
  6. ↑ What Is Cryptoeconomics? , retrieved 2022-08-06
  7. ↑ Introduction to Cryptoeconomics - Vitalik Buterin , retrieved 2022-08-06
  8. ↑ "A Beginner's Introduction to Cryptoeconomics". Binance Academy. Retrieved 2022-08-05.
  9. ↑ "Who Was Adam Smith?". Investopedia. Retrieved 2022-08-05.
  10. ↑ "UK regulatory approach to cryptoassets and stablecoins: Consultation and call for evidence" (PDF). HM Treasury. Retrieved 1 October 2021.
  11. ↑ "Bitcoin legal tender in El Salvador, first country ever". Mercopress. 10 June 2021.
  12. ↑ "Cuba's central bank now recognizes cryptocurrencies such as bitcoin". CNBC. 27 August 2021.
  13. ↑ "China declares all crypto-currency transactions illegal". BBC News. 24 September 2021. Retrieved 24 September 2021.
  14. ↑ Andrew Perrin. "16% of Americans say they have ever invested in, traded or used cryptocurrency". Pew Research Center. Retrieved 2022-08-06.
  15. ↑ "Cryptocurrency Statistics 2022: How Many People Use Crypto?". 2022-08-04. Retrieved 2022-08-06.
  16. ↑ Shiller, Robert (1 March 2014). "In Search of a Stable Electronic Currency". The New York Times. Archived from the original on 24 October 2014.
  17. ↑ Costelloe, Kevin (29 November 2017). "Bitcoin 'Ought to Be Outlawed,' Nobel Prize Winner Stiglitz Says". Bloomberg. Archived from the original on 12 June 2018. Retrieved 5 June 2018. It doesn't serve any socially useful function.
  18. ↑ "Economics Nobel prize winner, Richard Thaler: "The market that looks most like a bubble to me is Bitcoin and its brethren"". ECO Portuguese Economy. 22 January 2018. Archived from the original on 12 June 2018. Retrieved 7 June 2018.
  19. ↑ Krugman, Paul (29 January 2018). "Bubble, Bubble, Fraud and Trouble". The New York Times. Archived from the original on 4 June 2018.
  20. ↑ "Bitcoin biggest bubble in history, says economist who predicted 2008 crash". TheGuardian.com . 2 February 2018. Archived from the original on 12 June 2018.
  21. ↑ Huang, Jon; O'Neill, Claire; Tabuchi, Hiroko (3 September 2021). "Bitcoin Uses More Electricity Than Many Countries. How Is That Possible?". The New York Times. ISSN   0362-4331 . Retrieved 16 January 2022.
  22. ↑ "Monetarists Anonymous". The Economist. The Economist Newspaper Limited. 29 September 2012. Archived from the original on 20 October 2013. Retrieved 21 October 2013.
  23. ↑ Ball, James (22 March 2013). "Silk Road: the online drug marketplace that officials seem powerless to stop". theguardian.com. Guardian News and Media Limited. Archived from the original on 12 October 2013. Retrieved 20 October 2013.

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