Cryptoeconomics is an evolving economic paradigm for a cross-disciplinary approach to the study of

digital economies Digital usually refers to something using discrete digits, often binary digits. Technology and computing Hardware *Digital electronics, electronic circuits which operate using digital signals **Digital camera, which captures and stores digital i ...

and

Decentralized finance Decentralized finance (often stylized as DeFi) offers financial instruments without relying on intermediaries such as brokerages, exchanges, or banks by using smart contracts on a blockchain. DeFi platforms allow people to lend or borrow funds f ...

(DeFi) applications. Cryptoeconomics integrates concepts and principles from traditional

economics Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behaviour and intera ...

cryptography Cryptography, or cryptology (from grc, , translit=kryptós "hidden, secret"; and ''graphein'', "to write", or ''-logia'', "study", respectively), is the practice and study of techniques for secure communication in the presence of adver ...

computer science Computer science is the study of computation, automation, and information. Computer science spans theoretical disciplines (such as algorithms, theory of computation, information theory, and automation) to Applied science, practical discipli ...

, and

game theory Game theory is the study of mathematical models of strategic interactions among rational agents. Myerson, Roger B. (1991). ''Game Theory: Analysis of Conflict,'' Harvard University Press, p.&nbs1 Chapter-preview links, ppvii–xi It has appli ...

disciplines. Just as traditional economics provides a theoretical foundation for traditional financial (a.k.a., Centralized Finance or CeFi) services, cryptoeconomics provides a theoretical foundation for DeFi services bought and sold via

fiat Fiat Automobiles S.p.A. (, , ; originally FIAT, it, Fabbrica Italiana Automobili di Torino, lit=Italian Automobiles Factory of Turin) is an Italian automobile manufacturer, formerly part of Fiat Chrysler Automobiles, and since 2021 a subsidiary ...

cryptocurrencies A cryptocurrency, crypto-currency, or crypto is a digital currency designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or bank A bank is a financial i ...

, and executed by

smart contracts A smart contract is a computer program or a transaction protocol that is intended to automatically execute, control or document events and actions according to the terms of a contract or an agreement. The objectives of smart contracts are the re ...

Definitions and goals

The term ''cryptoeconomics'' was coined by the

Ethereum Ethereum is a decentralized, open-source blockchain with smart contract functionality. Ether (Abbreviation: ETH; sign: Ξ) is the native cryptocurrency of the platform. Among cryptocurrencies, ether is second only to bitcoin in market capita ...

community during its formative years (2014-2015), but was initially inspired by the application of economic incentives in the original

Bitcoin Bitcoin ( abbreviation: BTC; sign: ₿) is a decentralized digital currency that can be transferred on the peer-to-peer bitcoin network. Bitcoin transactions are verified by network nodes through cryptography and recorded in a public distr ...

protocol in 2008. Although the phrase is typically attributed to

Vitalik Buterin Vitaly "Vitalik" Buterin (born 1994) is a Russian-Canadian computer programmer and founder of Ethereum. Buterin became involved with cryptocurrency early in its inception, co-founding ''Bitcoin Magazine'' in 2011. In 2014, Buterin deployed Eth ...

, the earliest public documented usage is a 2015 talk by Vlad Zamfir entitled "What is Cryptoeconomics?". Zamfir's view of cryptoeconomics is relatively broad and academic: "... a formal discipline that studies protocols that govern the production, distribution, and consumption of goods and services in a decentralized digital economy. Cryptoeconomics is a practical science that focuses on the design and characterization of these protocols". Alternatively, in a 2017 talk, Buterin's view is more narrow and pragmatic: "... a methodology for building systems that try to guarantee certain kinds of information security properties". The primary goals of cryptoeconomics are to understand how to fund, design, develop, and facilitate the operations of (DeFi) systems, and to apply economic incentives and penalties to regulate the distribution of goods and services in emerging digital economies. Cryptoeconomics may be considered an evolution of digital economics, which in turn evolved from traditional economics (commonly divided into

microeconomics Microeconomics is a branch of mainstream economics that studies the behavior of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms. Microeconomics fo ...

and

macroeconomics Macroeconomics (from the Greek prefix ''makro-'' meaning "large" + ''economics'') is a branch of economics dealing with performance, structure, behavior, and decision-making of an economy as a whole. For example, using interest rates, taxes, and ...

). Consequently, traditional economic concepts regarding

production Production may refer to: Economics and business * Production (economics) * Production, the act of manufacturing goods * Production, in the outline of industrial organization, the act of making products (goods and services) * Production as a stati ...

distribution Distribution may refer to: Mathematics *Distribution (mathematics), generalized functions used to formulate solutions of partial differential equations * Probability distribution, the probability of a particular value or value range of a vari ...

, and consumption of goods and services also apply to cryptoeconomics. For example, these include

Adam Smith Adam Smith (baptized 1723 – 17 July 1790) was a Scottish economist and philosopher who was a pioneer in the thinking of political economy and key figure during the Scottish Enlightenment. Seen by some as "The Father of Economics"——— ...

's three basic laws of economics:

Law of Supply and Demand In microeconomics, supply and demand is an economic model of price determination in a market. It postulates that, holding all else equal, in a competitive market, the unit price for a particular good, or other traded item such as labor or ...

, Law of Self Interest, and Law of Competition. They also include more modern economic concepts, such as fiat money theory and

Modern Monetary Theory Modern Monetary Theory or Modern Money Theory (MMT) is a heterodox * * * * * * macroeconomic theory that describes currency as a public monopoly and unemployment as evidence that a currency monopolist is overly restricting the supply of t ...

History

The historical roots of cryptoeconomics can be traced to the rise of

altcoin A cryptocurrency, crypto-currency, or crypto is a digital currency designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it. It is ...

s, prominent among them the Ethereum project, which in 2015 pioneered the integration of smart contracts into its blockchain, thereby enabling a wide range of DeFi applications.

Subdisciplines

Similar to how traditional economics is divided into

(regional, national, and international economics) and

(individual and enterprise economics) subdisciplines, cryptoeconomics can be divided into crypto-macreconomics and crypto-microeconomics subdisciplines.

Crypto-macroeconomics

Crypto-macroeconomics is concerned with the regional, national, and international regulation of cryptocurrencies and DeFi transactions. The

Group of Seven The Group of Seven (G7) is an intergovernmental political forum consisting of Canada, France, Germany, Italy, Japan, the United Kingdom and the United States; additionally, the European Union (EU) is a "non-enumerated member". It is official ...

governments' interest in cryptocurrencies became evident in August 2014, when the United Kingdom

Treasury A treasury is either *A government department related to finance and taxation, a finance ministry. *A place or location where treasure, such as currency or precious items are kept. These can be state or royal property, church treasure or in p ...

commissioned a study of cryptocurrencies and their potential role in the UK economy, and issued its final report in January 2021. In June 2021, El Salvador became the first country to accept Bitcoin as

legal tender Legal tender is a form of money that courts of law are required to recognize as satisfactory payment for any monetary debt. Each jurisdiction determines what is legal tender, but essentially it is anything which when offered ("tendered") in pa ...

. In August 2021, Cuba followed with a legal resolution to recognize and regulate cryptocurrencies such as Bitcoin. However, in September 2021, the government of China, the single largest market for cryptocurrency, declared all cryptocurrency transactions illegal, completing a crackdown on cryptocurrency that had previously banned the operation of intermediaries and miners within China.

Crypto-microeconomics

Crypto-microeconomics is concerned with the individual and enterprise usages of cryptocurrencies and DeFi transactions. A strong majority of USA adults have heard about major cryptocurrencies (Bitcoin, Ether), and 16% say they personally have invested in, traded, or otherwise used one. More than 300 million people use cryptocurrency worldwide, and approximately 46 million Americans have invested in Bitcoin.

Criticisms and controversies

Bitcoin, along with other cryptocurrencies, has been described as an

economic bubble An economic bubble (also called a speculative bubble or a financial bubble) is a period when current asset prices greatly exceed their intrinsic valuation, being the valuation that the underlying long-term fundamentals justify. Bubbles can be c ...

by many distinguished economists, including

Robert Shiller Robert James Shiller (born March 29, 1946) is an American economist, academic, and author. As of 2019, he serves as a Sterling Professor of Economics at Yale University and is a fellow at the Yale School of Management's International Center fo ...

Joseph Stiglitz Joseph Eugene Stiglitz (; born February 9, 1943) is an American New Keynesian economist, a public policy analyst, and a full professor at Columbia University. He is a recipient of the Nobel Memorial Prize in Economic Sciences (2001) and the Joh ...

Richard Thaler Richard H. Thaler (; born September 12, 1945) is an American economist and the Charles R. Walgreen Distinguished Service Professor of Behavioral Science and Economics at the University of Chicago Booth School of Business. In 2015, Thaler was pr ...

Paul Krugman Paul Robin Krugman ( ; born February 28, 1953) is an American economist, who is Distinguished Professor of Economics at the Graduate Center of the City University of New York, and a columnist for ''The New York Times''. In 2008, Krugman was th ...

, and

Nouriel Roubini Nouriel Roubini (born March 9 1958) is a Turkish-born Iranian-American economist. He is Professor Emeritus (2021–present) and was Professor of Economics (1995–2021) at the Stern School of Business, New York University, and also chairman of Ro ...

. In addition, Bitcoin and other cryptocurrencies have been criticized for the amount of electricity required for cryptocurrency "mining" (blockchain transaction validation), and for their use to purchase illegal goods.

References

External links

*
CryptoEconomics Works - web information portal

MIT Cryptoeconomics Lab

Wikiversity - Cryptoeconomics