Cryptoeconomics refers to the use of economics (through incentives) and cryptography (through encryption) to design a secure system or network with predefined desired properties. Cryptoeconomics is the combination of cryptography and economic theory to create sustainable operating protocols for trust-less and decentralized platforms. Cryptography deals with securing data, encryption of information and their safe transfer across different systems and platforms. On the other hand, it deals with protocols that define the distribution, production, and trade of various goods and services in a digital ecosystem. By obscuring a third party from seeing messages passed between two parties peer to peer interactions of all types become secure. Layering economic incentives on top of the secure protocols compels users of a platform to act in certain ways on the platform because of rewards or penalties tied to their behavior.
A cryptocurrency has a distributed ledger called a block chain. The block chain keeps track of every transaction that occurs across the cryptocurrency. This block chain must stay up-to-date and verified which requires someone in the network to do that validation. The blockchain and Hashgraph technologies run on the principles of cryptoeconomics.
There are two pillars of cryptoeconomics as the name itself suggests:
Cryptography: The cryptography aspect underlying these systems is what allows communications and interactions between peers in the network to be proved and secured. Blockchain technology uses cryptographical functions for its operations. The main functions that run the blockchain:
- Proof of work
- Zero Knowledge Proofs
Cryptography allows for the passing of messages in a secure way. Cryptography in Blockchain converts information into a format that’s undecipherable for the associate user without authorization. This lets us transmit it while entities with authorization decipher it back to a decipherable format, therefore compromising the info.
Cryptography is closely related to the disciplines of cryptology and cryptanalysis. Cryptography includes techniques equivalent to microdots, merging words with pictures, and different ways in which to cover info in storage or transit.
However, in today’s computer-centric world, cryptography is most frequently related to scrambling plaintext (ordinary text, generally stated as cleartext) into ciphertext (a method known as encryption), then back once more (known as decryption). People WHO follow this field area unit referred to as cryptographers.
How Blockchain Works
Blockchain Cryptography involves making written or generated codes that enable info to be unbroken secret. Information security uses cryptography in Blockchain on many levels. the data cannot be scan while not a key to rewriting it. The data maintains its integrity throughout transit and whereas being held on. Blockchain Cryptography additionally aids in non-repudiation. This implies that the sender and also the delivery of a message is verified.
Modern Cryptography in Blockchain has four objectives which it is most concerned to.
Economics: The place where blockchain differs from other decentralized peer-to-peer system is that it gives its users financial and economic incentives to get some work done. Like with any solid economic system, there should be incentives and rewards for people to get work done, similarly, there should be a punishment system for miners who do not act ethically or do not do a good job. In simple terms, cryptoeconomics is a new field of study that analyses economic interactions in the decentralized digital economy that was pioneered by bitcoin. It is the foundation on which cryptocurrencies and digital assets are built on.
How Cryptoeconomics Changed Peer-to-Peer Networks
The bitcoin network was not the first decentralized peer-to-peer network. Before Bitcoin, we had peer-to-peer file sharing platforms such as Morpheus, and Kazaa, where users from across the world would share files with other members of the decentralized peer-to-peer network. However, what these file sharing platforms were missing was an economic incentive. Without economic incentives, there was little reason for users to keep seeding files that take space on their computers so that other users can download them. Aside from the legal aspect of sharing copyrighted material, a lack of economic incentive is what contributed to the demise of the above-mentioned platforms. In simple terms, crypto economics provides a way to coordinate the behavior of network participants by combining cryptography with economics. More specifically, crypto economics is an area of computer science that attempts to solve participant coordination problems in digital ecosystems through cryptography and economic incentives.
The role of cryptoeconomics in Bitcoin mining
The goal of Bitcoin is to create a value transfer network that accurately verifies transfers of value, and that is immutable and censorship-resistant. This is achieved through the process of mining, in which miners who successfully validate a block of transactions are rewarded in bitcoin. Such economic incentive encourages miners to act honestly, making the network more reliable and secure. The process of mining involves solving a difficult mathematical problem based on a cryptographic hash algorithm. In this context, hashes are used to tie each block to the next block, essentially creating a timestamped record of approved transactions called the blockchain. Hashes are also utilized in the computational puzzles that miners are competing to solve. Additionally, one of the consensus rules that transactions have to follow is that a bitcoin can only be spent if a valid digital signature is generated from a private key. These technological rules relating to mining are aligned with the security requirements of the Bitcoin network, including preventing malicious actors from taking control. Cryptoeconomics enables parties who do not know one another to reach consensus about the state of a blockchain. Without the application of cryptoeconomic principles, decentralized blockchain networks like Bitcoin and Ethereum simply cannot work.
How do crypto economics have value?
Crypto economics have value because of the same reason that money, in general, has value, trust. When people trust a commodity and give it value, it becomes a currency, that’s the same reason why fiat has value and why gold had value in the first place. So, when a given commodity is given value, the value changes in accordance with one of the oldest rules in economics, called Supply and Demand.
Crypto economics is still a brand new field of study, despite cryptography and economics being established disciplines. Safe to say, it is only ten years old. As such, it is constantly evolving and will continue to do so for many more decades. We don’t know what the future holds or how the landscape of cryptoeconomics is going to evolve, but we can be sure at the very least that brilliant developers will either build better systems or improve the ones we have now. It is hard to predict the future of such a new field of social science. However, the developments in crypto economics in the past decade or so are suggesting that crypto economics has the potential to play a major role in society. Through the use of trustless peer-to-peer payment networks and self-executing smart contracts, intermediaries can be alleviated while payment speed and security can be increased. As technology becomes an increasingly important part of our day-to-day lives it would only make sense for economics to become part of that too.
So as you can see, cryptography and economics have combined in a very beautiful and intricate manner to create the blockchain technology. The growth that it has experienced over the last few years is staggering and it is only going to get better and more widely used. We’ve learned that cryptoeconomics is the backbone of decentralized p2p networks. Cryptoeconomics combines cryptography with economic incentives to keep the network secure and incentivize participation.
As a new and basically non-academic field within the crypto community, cryptoeconomics is constantly evolving and depends on the theorizing and problem-solving skills of everyone in the crypto community. In simple terms, cryptoeconomics is a new field of study that analyses economic interactions in the decentralized digital economy that was pioneered by bitcoin. It is the foundation on which cryptocurrencies and digital assets are built on. In the future, cryptocurrencies could move towards a proof-of-stake model. If you own a significant amount of cryptocurrency, you have incentive to keep the validity of the blockchain up to date. Proof-of-stake algorithms can be significantly less energy intensive. Designing a cryptoeconomic structure is like designing a robot that will be released into a large crowd of people with the goal of not only surviving, but also of herding the crowd to do something for it.