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Cryptoeconomics

Cryptoeconomics is the study of mechanism design using cryptographically secure incentive distribution.

Cryptoeconomics focuses on incentive structures that use cryptocurrencies and virtual currencies. This allows for financial outcomes for users of a cryptoeconomic system governed by computer code.[1] Using financial cryptography (such as smart contracts), both the production and distribution of a given digital asset can be determined, allowing for novel systems such as decentralized digital currencies and decentralized autonomous organizations.[2]

Applications

Bitcoin

Bitcoin's proof-of-work system[3] is widely regarded as the first successful cryptoeconomic mechanism.[4] The incentive structure is programmed into the Bitcoin protocol using the blockchain, the rules of the system are transparent and immutable. In the Bitcoin network, miners use computing power to solve mathematical problems; if successful they are rewarded in Bitcoins, this acts as incentive.[5][dubious ] To compromise the blockchain a bad actor must control over fifty percent of the total computing power used for mining. Having additional miners therefore disincentivizes attackers; as they in turn would have to increase their compute to reach the fifty percent level.[6][7] Importantly, utility gained from successful attack would be diminished as the attack would likely decrease the value of Bitcoin and specialized mining hardware. This financial loss for the attacker deters attacks on Bitcoin.[8]

Ethereum

Ethereum started with the same cryptographic protocol design as Bitcoin. It is currently[when?] implementing a proof-of-stake protocol[9] as a lower energy alternative to proof-of-work protocols. The new proof-of-stake protocol was designed in line with cryptoeconomic principles through creating financial penalties[10][11] for individuals that attempt to perform malicious actions that destabilize the system.

Other

State Channels

State channels are mechanisms that allow digital transactions and data transfer to happen outside a Bitcoin-like blockchain system while maintaining the same cryptoeconomic guarantees.[12] If disagreement arises on the state channel, these interactions can be brought back onto the blockchain for settlement. State channels are also referred to as a “layer 2 solution”[13][14] as it has the option of reverting to the original blockchain, or the “layer 1”. With state channels, interactions can happen at zero cost while maintaining the security guarantees of a blockchain.[15]

See also

References

  1. ^ Vigna, P; Casey, MJ (January 27, 2015). The Age of Cryptocurrency: How Bitcoin and the Blockchain Are Challenging the Global Economic Order. St. Martin's Press. ISBN 9781250065636.
  2. ^ Diedrich, Henning (2016). Ethereum: Blockchains, Digital Assets, Smart Contracts, Decentralized Autonomous Organizations. Wildfire Publishing. ISBN 978-1523930470.
  3. ^ Nakamoto, Satoshi (31 Oct 2008). "Bitcoin White Paper". bytepapers.com.
  4. ^ "Making Sense of Cryptoeconomics - CoinDesk". CoinDesk. 2017-08-19. Retrieved 2018-08-10.
  5. ^ Buterin, Vitalik. "Introduction to Cryptoeconomics". Vitalik Buterin's Website. Archived from the original (PDF) on 17 Feb 2017.
  6. ^ "Majority attack - Bitcoin Wiki". en.bitcoin.it. Retrieved 2018-08-10.
  7. ^ Michael J. Casey; Paul Vigna (16 June 2014). "Short-Term Fixes To Avert "51% Attack". Money Beat. Wall Street Journal. Retrieved 30 June 2014.
  8. ^ "Are 51% Attacks a Real Threat to Bitcoin?". CoinDesk. 2014-06-20. Retrieved 2018-08-10.
  9. ^ Floersch, Karl (1 Feb 2018). "Ethereum Proof of Stake" (PDF). Stanford Cyber Initiative.
  10. ^ "Ethereum Mining: Proof of Stake/Proof of Work Hybrid Model". Blockgeeks. Retrieved 2018-08-10.
  11. ^ "Minimal Slashing Condition in Ethereum". EtherWorld.co. 2017-04-20. Retrieved 2018-08-10.
  12. ^ Coleman, Jeff (9 Aug 2018). "Counterfactual: Generalized Statechannels". l4.ventures. Archived from the original (PDF) on 12 June 2018.
  13. ^ "'Layer 2' Blockchain Tech Is an Even Bigger Deal Than You Think - CoinDesk". CoinDesk. 2018-05-30. Retrieved 2018-08-10.
  14. ^ "Three "Second Layer" Blockchain Solutions to Keep an Eye On". Hacker Noon. 2018-07-12. Retrieved 2018-08-10.
  15. ^ Miller, Andrew; Bentov, Iddo; Kumaresan, Ranjit; Cordi, Christopher; McCorry, Patrick (2017). "Sprites and State Channels: Payment Networks that Go Faster than Lightning". arXiv:1702.05812 [cs.CR].

External links