Crypto FAQ: What is cryptoeconomics and how does it work?
- Alt. Phrasing: What is a digital economy?; What is a cryptoeconomy?; What is Decentralized Finance (DeFi)?
Defn: cryptoeconomics
[noun: portmanteau of "cryptocurrency" + "economy"]Cryptoeconomics *is a cross-disciplinary approach to the study of digital economies and decentralized finance (DeFi) applications. In addition to traditional economic concepts and principles (production, distribution, and consumption of goods and services) cryptoeconomics synergistically integrates concepts and principles from cryptography, computer science, and mathematical game theory disciplines.
Cryptoeconomics Cross-Discipline Tetrad
Stated succinctly as an analogy:
cryptoeconomics : Decentralized Finance (DeFi) :: [traditional] economics : Centralized Finance (CeFi)
Goals: see FAQ: What are the goals of cryptoeconomics?
- Contributions from Cross-disciplines: Selected major contributions from the four cross-disciplines of cryptoeconomics are listed below:
- Economics
- Law of Supply & Demand
- Law of Self Interest
- Law of Competition
- Fiat Money Theory
- Modern Monetary Theory (MMT)
- Cryptography
- cryptographic keys
- hash functions
- asymmetric (public key) encryption
- Multi-Factor Authentication (MFA)
- End-to-End Encryption (E2EE)
- Zero Knowledge Proofs (ZKP)
- Computer Science
- peer-to-peer (P2P) network architectures
- Distributed Ledger Technology (DLT)
- DLT data structures, blockchains, Directed Acyclic Graphs, Merkel Trees
- single (central) point of failure
- Byzantine Fault Tolerance (BFT)
- consensus algorithms
- digital signatures
- Mathematical Game Theory
- Nash equilibrium
- Byzantine Generals Problem
- Prisoner's Dilemma
- Markov Decision Process
- Schelling game
- P + epsilon Attack
- Economics
* How It works: see How [Cryptoeconomics] Works section of this web
Example Applications:
Various examples exist of the practical adoption of cryptoeconomic and DeFi principles, with mixed results. On one hand, the potential adoption of blockchain-based ID (identification) through Cardano in Ethiopa could radically accelerate the country's economic development, though the project faces backlash for its "crypto-colonial" nature. Less successful were attempts in El Salvado and Puerto Rico: the former has remained vastly in debt despite efforts to use Bitcoin to circumvent this, while the latter's attempt to use cryptocurrencies to reverse the damages of Hurricane Maria ultimately proved to be futile. This being said, the potential of DeFi platforms to promote greater financial inclusion within developing nations, thereby helping to decrease poverty in these nations, cannot be ignored.- References:
- Brekke, Jaya Klara and Wassim Zuhair Alsindi. Cryptoeconomics, Internet Policy Review 10.2, 2021.
- Chris Berg, Sinclair Davidson, Jason Potts. Understanding the Blockchain Economy: An Introduction to Institutional Cryptoeconomics. Edward Elgar Publishing, 2019.
- Jian Gong, Wei Xu. Cryptoeconomics: Igniting a New Era of Blockchain. CRC Press, 2020.
- Ziyao Liu, et al. A Survey on Applications of Game Theory in Blockchain. IEEE, 2019.
- Vitalik Buterin. The P + epsilon Attack. Ethereum Foundation Blog, 2015.
- Brekke, Jaya Klara and Wassim Zuhair Alsindi. Cryptoeconomics, Internet Policy Review 10.2, 2021.
- See also:
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