Sunday, December 26, 2021

At A Glance – Cryptoeconomics

The economics of cryptocurrencies, or a new economic model? Neither

It may sound strange, but crypto-economics is not the economics of cryptocurrencies, and neither is it a subfield of economics. Instead, it is an interdisciplinary method of designing certain systems by combining cryptography and economic incentives. Cryptoeconomics is often described in conjunction with mechanism design, which is the economic study of mechanisms to incentivize actions.

What is Cryptoeconomics

Given its name, crypto-economics is largely associated with cryptocurrencies. Bitcoin and Ethereum, the two largest digital currencies, are based on crypto-economics. Cryptography plays a central role in providing secure and exclusive control to verified users. Economic incentives are set up to encourage users to act in a way that benefits the system. In other words, constructive participation (like creating blocks) is rewarded with the currency itself, but malpractice can lead to penalties. However, not all blockchain applications are the result of crypto-economics, and crypto-economic systems are not confined to blockchains.

Cryptoeconomics is a practical science that uses cryptography to design rules based on economic theory. As a holistic approach, it reflects the merging of disciplines to solve problems. Crypto economic systems should be viewed as distinct from cryptocurrencies, despite playing a fundamental role in how many are designed. As more data is exchanged digitally, crypto-economics could provide a secure and logical framework for creating productive B2B, B2C, and P2P transactions.

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