What is Cryptoeconomics ?

Published in

Coinmonks

4 min readMar 12, 2022

Introduction

Since our ancestral time humans have collaborated together to increase their survival chances in wild. Even in nature a population survives due to cooperation. Collaboration/Coordination is a way where people work in large group to solve a common problem and it arises out of common motivation and incentives. Example from WW1 is “Live and Let Live” where enemies on both side of trench ceased fire. With time the evolution and complexity of cooperation has improved.

Collaboration/Cooperation also has a philosophically counterintuitive dark side as it can lead to collusion. If coordination left for itself or improved in unbalanced way can lead to harmful outcomes.

With crypto-economic protocol we can have anti collusion cooperation enabled working towards a common goal.

Cryptoeconomics ELI5

It is design of incentive mechanism that influences a human behaviour to play a cooperative game while optimising individual self game for a common goal while being collusion resistant. It’s the secret ingredient for decentralised autonomous bottom up system.

It is also known by various names in web3 communities such as tokenised ecosystem, mechanism design, token-economics, financial cryptography or incentive engineering and can have different contextual meaning

Understructure of crypto economic systems.

Crypto-economic system are basically a system ie complex system. Complex systems are system whose whose collective subparts has a emergent behaviour which can’t be inferred from properties of its subparts. They are multiscale spatiotemporal dynamics network where people within the system can take local decisions with global information. People are incentivised by the system to work towards the system objective function with their self interest. For social economic activities a governance infrastructure is provided by these cryptoeconomic system. These systems have properties such as emergence, non linearity, adaption, spontaneous order and feedback loop which are achieved by cross convergence of game theory, mechanism design, cryptography, control theory, differential games and complex system fields.

Cryptoeconomic as bioinspired system

Every crypto-economic protocol has objective function. Optimisation problem is iterative way to find best solution from all feasible solutions. The field of optimisation has gradient decent methods to global optimisations methods and even evolutionary algorithms where survival of fittest happens. Objective function should have formulate the problem that needs to maximised or minimised. In bitcoin case it is maximize the security of its network via hash rate. Different types of optimisation algorithms can be used as per objective function.

Crypto-economic system has lots of resembles with evolutionary algorithms which nature deploys.

Both Evolutionary algorithms and crypto-economics have an objection function. We then measure and evaluate to know if our optimiser is working right and in blockchain it is proof pow. In evolutionary algorithm it is survival of the fittest and agent work around objective function to be evaluated. In bitcoin/cryptoeconomic system miners do anything to get a nonce which is very similar to evolutionary algorithms. EA algo are quite different than many optimisation algorithms like gradient descent which is top down approach but similar to swarm optimiser algorithms. Both EA and CE have system clock where in CE it is block reward interval and CE it is generation. Now rewards in CE are tokens with punish as slashing. Similarly in EA reward is offspring with death as punishment. Both miners in CE and Agents in EA can’t be controlled.

Tokens :the atomic unit of state of the cryptoeconomic system

Tokens are the representation of the economic state of the crypto-economic system. People generally confuse it with fiat that only represent monetary value. Tokens give right to change the economic state of the system. These tokens are provable and durable because of the existing universal state and solves the double spending problem associated with online network. They are equipped with mechanism for autonomous formation and operation of decentralized network, maintain universal state, p2p transactions and coordination

The need for decentralisation

Decentralisation is required for a network to achieve fault tolerance (hetreogenous), attack resistance, collusion resistance. Sometimes the system can act like self-interested unitary monopolies and system must have mechanism to prevent unhealthy coordination. Decentralisation also enable liquid ownership and network can regrow itself even if it’s chopped like star fish. With such arch rent extraction via middle men is mitigated and value can be effectively distributed to engaging agents.