AaronVick.com - Cyrpto Update May 19 2021

The Current State of Cryptoeconomics: May 2021

By cypress101 | AaronVickCrypto | 19 May 2021

Ok, crypto is hot, hot, hot right now and with the volatile swings in Bitcoin, Ethereum, Litecoin, and Dogecoin the market analysts are debating whether or not the bull market has 6 months left or not. Crypto took a nose dive today with some of the biggest dips compared to the current 2021 uptrend. I will save you the agony of reading all those articles that debate the future of crypto, which is a topic way too vast to cover here.  Instead, I'll give you a brief overview.  In regards to the notion that crypto speculation (or investment) is a bubble, I'd rather have it be a bubble than not have it at all!

But, what is Cryptoeconomics?

Coding is such a creative outlet for the more technically minded, so I like to think of this as cryptoeconomics for coders. Blockchain is an amazing invention. And to be completely honest, I think any non-technical person can grasp what blockchain is and the cool use cases it holds, irrespective of how many times they see the word "blockchain" and consequently hear how big a deal it is. But when people say "blockchain" to me, I often equate it to "money laundering". Now that's not a very good association, because blockchain technology has many uses other than money laundering. So in this post, I'm going to try and explain cryptoeconomics and its impact on the blockchain space.

Cryptoeconomics is the study of incentivizing sane, rational, and responsible behaviors in a decentralized environment. It is a new field that blends cryptography, game theory, and coding skills. Cryptoeconomics has become an integral part of what we can now call - "The Blockchain Revolution", whereby blockchain technology will be used to bring about a societal shift by creating new financial systems for the world in which we live. With cryptoeconomics, transactions take place on a blockchain with no interference from centralized middlemen. Cryptoeconomics is the study of incentivizing sane, rational, and responsible behaviors in a decentralized environment. It is a new field that blends cryptography, game theory, and coding skills. Instead of relying on verification from third parties (and we know how that has ended up for us lately !), in blockchain-based systems, an incentive mechanism is used to ensure that the right behaviors are being engendered. This means that every action on the Blockchain must have its own reward, and no middleman will be able to interfere with it. This is the power of cryptoeconomics.

What are Examples of Cryptoeconomic Behavior?

We've all seen how certain events can bring about a market crash. A country experiences a financial crisis and people rush to sell their gold or stock market investments, as they think it is better to get out now while others are still buying. We've also seen how the actions of one individual can influence the price of a coin, be that by being able to significantly influence supply when there is doubt in its future supply or increasing demand if more people are buying now.  But there is another way that a single individual can influence the price of a coin, and it is through a mechanism known as "Whitepaper Evaluation". This of course refers to the evaluation of whitepapers. Whitepapers are written by various individuals who want to get their ideas funded and once they have completed their writing, they need to find someone to evaluate it.  Usually, this person will be an industry expert or investor in the space so that they can give their unbiased opinion on what the whitepaper says, giving potential funders a good idea how much value it will bring to them. There is a lot of money at stake, so it is a high-risk move by the people writing the whitepaper to be honest and straightforward enough to get funding for their ideas.  And if the project they were crowdfunded for dies out or takes too long to get off the ground, then it could negatively affect their reputation. Cryptoeconomics covers these types of behaviors and provides accountability through coded incentives rather than third-party verification.

Crypto economics is about keeping honest participants honest. If we have a bunch of people trying to cheat the system, then the system loses its credibility. Cryptoeconomics was created to assist project participants or backers who wish to invest in new projects. If they sign up for a service on Facebook, they can use an app that will pre-screen their profile and investigate their background thoroughly before allowing them into a certain group. If you play poker, then it has been proven that there are cheaters at every table who are trying to get you into their hands so that they can steal from you.  This is what cryptoeconomics is designed to prevent; project participants from being able to take advantage of others through deception or excessive leveraging of positions in the project space.

Cryptoeconomics in Practice

There are a number of systems that use cryptoeconomic mechanics. One example is the BitShares project, where there are incentives for people to offer up their computing resources for the network. This is how BitShares achieves decentralization, making it immune to hacks or attacks of any kind that may be carried out against the network. Another interesting concept is that of artificial stock markets, where you can invest in cryptos just as in a normal stock market. Some even have an internal exchange where you can trade them back and forth with other participants on the platform. In the future, these types of systems are likely to impact our lives in a myriad of ways, with the most significant being sound money and viable financial systems for the entire world.  In the future, there will be many different types of cryptoeconomic incentive mechanisms at work to keep communities honest. Hopefully, they will be able to advance the blockchain space with their development.

The Future of Cryptoeconomics

If you pay close attention to the blockchain space, you'll see that there are a lot of startups that are using these types of incentives to create a positive influence on their respective networks.  In the future, with more and more people getting into Cryptoeconomics, we will have teams working together on developing different incentive systems that can help company participants maintain honesty and trustworthiness within their respective communities.  This will go a long way towards making sure that enterprise blockchain systems and business models are able to grow and achieve their goals effectively. Its revolutionary applications could change our lives for the better, giving millions of people access to financial tools that they have never had before.

Cryptoeconomics is a very interesting concept, and it is only going to grow in the future. I'm excited to see what happens in the coming years. If you have any questions, comments, or concerns about this post, feel free to reach out on social media & let's start a dialogue! 

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Former CEO. Lifelong introvert. Avid technology evangelist. Unapologetic nerd. Writer. Inventor. Entrepreneur, advisor, & board member who loves #startups.


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