Cryptoeconomics

= "a term that has come to describe the mechanics and specifics of token distribution, according to a given sale and ownership structure". [1]

Contextual Quote

"The stateful nature of cryptoeconomic systems has the potential to cede control of data back to the users of these platforms, if privacy by design is considered in the modeling of the cryptoeconomic systems and their applications."

- Shermin Voshmgir and Michael Zargham [2]

Description

Shermin Voshmgir and Michael Zargham:

1.

"Cryptoeconomics is an emerging field of economic coordination games in cryptographically secured peer-to-peer networks. The term cryptoeconomics was casually coined in the Ethereum developer community, and is generally attributed to Vitalik Buterin. The earliest recorded citation is from a talk by Vlad Zamfir [Zamfir 2015], which was later loosely formalized in blog posts and talks by Buterin [Buterin 2017a], [Buterin 2017b]. The term has gained traction in the broader developer community [Tomaino 2017a] and in the academic community [Catalini and Gans 2016], but it still remains under-defined, possibly because it is often used in so many different contexts. Using the same term in different contexts leads to communication breakdowns and challenges when trying to come up with a rigorous definition of that term."

(https://epub.wu.ac.at/7782/1/Foundations%20of%20Cryptoeconomic%20Systems.pdf)

2.

"Cryptoeconomic systems are complex socioeconomic networks defined by

(i) individual autonomous actors,

(ii) economic policies embedded in software (the protocol or smart contract code), and

(iii) emergent properties arising from the interactions of those actors with the whole network, according to the rules defined by that software.

A comprehensive definition of cryptoeconomics therefore includes three levels of analysis:

(i) micro-foundational, relating to agent level behaviors

(ii) meso-institutional, relating to policy setting and governance and

(iii) macroobserverable, relating to the measurement and analysis the system level metrics."

Typology

Shermin Voshmgir and Michael Zargham:

"Cryptoeconomics relates three interactions layers or levels of analysis that define characteristics at the micro-foundational, meso-institutional, and macroobserverable domains of scope.

• a Macro-observables are system global properties that inform decision-making

at the meso-institutional level and provide stakeholder feedback, performance indicators and measures that can impact micro-foundational properties.

• b Meso-institutional characteristics encompass decision-making and goal determination, based upon and requiring micro-foundations. Mechanism design as

used in Economics informs institutions, organisations and teams.

• c Micro-foundational characteristics are assumption specifications with a natural expression within mechanism design as used within Computer Science.

Informal Governance is a form of decentralized governance whereby changes to the protocol are made locally by individual participants operating nodes in the peer-to-peer network and changes only take effect if the majority of participants adopt the change."

((https://epub.wu.ac.at/7782/1/Foundations%20of%20Cryptoeconomic%20Systems.pdf)

Examples

"A cryptoeconomic system such as the Bitcoin network can be described as a special class of complex socioeconomic system that is dynamic, adaptive, and multi-scale. Cryptoeconomic networks are dynamic due to the flow of information and assets through the network. Cryptoeconomic networks are adaptive because their behaviour adjusts in response to their environment, either directly in the case of the Bitcoin difficulty controller or more broadly through decisions on the part of node operators. Cryptoeconomic networks are multi-scale because they are specified by local protocols but are defined by their macro-scale properties, as is the case with the local ”no double spend” rule guaranteeing a globally conserved token supply [Zargham, Zhang and Preciado 2018]. Their design requires a strong interdisciplinary approach to develop resilient protocols that account for the spatial and temporal dynamics of those networks [Liaskos, Wang and Alimohammadi 2019]."

(https://epub.wu.ac.at/7782/1/Foundations%20of%20Cryptoeconomic%20Systems.pdf)

Discussion

A UNIFYING PERSPECTIVE ON CRYPTOECONOMICS

Shermin Voshmgir and Michael Zargham:

"Cryptoeconomic systems are complex socioeconomic networks defined by

(i) individual autonomous actors,

(ii) economic policies embedded in software (the protocol or smart contract code), and

(iii) emergent properties arising from the interactions of those actors with the whole network, according to the rules defined by that software.

A comprehensive definition of cryptoeconomics therefore includes three levels of analysis:

(i) micro-foundational, relating to agent level behaviors

(ii) meso-institutional, relating to policy setting and governance and

(iii) macroobserverable, relating to the measurement and analysis the system level metrics.

Critically, the dynamics at each level of analysis are interdependent in a manner which cannot be simply reduced into a single layer–governance is precisely managing the relationship between the micro and macro scales. Micro-foundational characteristics of cryptoeconomic systems are commonly expressed in terms of algorithmic game theory in the computer science literature [Nisan et al. 2007] and mechanism design in the economics literature [Hurwicz and Reiter 2006]. Mechanism design is sometimes referred to as reverse game theory as it pertains to the construction of games to produce specific behaviors from agents. Nakamoto Consensus, for example, is a cryptoeconomic mechanism based on proof-of-work that is designed to provide convergence to a dynamic equilibrium–a synchronous shared global state, which furthermore remains resistant to a range of attacks constituting of self-interested misinformation despite being a permissionless network. An attack would be any violation of the state transition rules encoded in the protocol, such as a “double spend’. Nakamoto consensus uses a combination of cryptographic tools with economic incentives that make economic cost of wrongdoing disproportionate to the benefit of doing so [Nakamoto 2008], [Antonopoulos 2014]. Proof-of-stake mechanisms provide similar game theoretic arguments for network security. Interestingly, proof-of-authority networks [De Angelis et al. 2018] offer a more traditional approach where the validator role is permissioned and stems from social and institutional reputational processes which exist outside the computational environment. Most current definitions of cryptoeconomics focus on this level of analysis and modeling [Buterin 2017a], [Buterin 2017b] [Tomaino 2017a]. However, the level of security very much depends on how people react to economic incentives, which in turn has been a field of study in economics [Voshmgir 2020]; the security of the network is an emergent macro level property. Macro-observables are system-wide metrics or properties which may inform decision-making of stakeholders within the system. Macro-observables often include performance indicators that impact governance decisions at the meso-institutional level as well as measures that can impact perception and thus behavior at the microfoundational level. In addition to security, market capitalization, price [Shorish 2019], [Cong, Li and Wang 2019] and price stability are the most commonly studied macro-observables. Other important macro-observables include wealth distributions, governance participation, monthly active users, and any other measure or estimate which serves as a proxy for system level goal that matters to a cryptoeconomic network’s human stakeholders. Critically, macro-observables are not directly controllable; efforts to impact these metrics are determined at the meso scale and the consequences of those interventions are borne out at the micro scale.

Meso-institutional characteristics encompass decision-making and goal determination, based upon macroobservables and requiring micro-foundations. This level builds on political science, law, governance and economics to design the steering processes of communities, by some referred to as institutional cryptoeconomics [Berg, Davidson and Potts 2019]. Ethical design and informed governance of cryptoeconomic systems resides in the meso-institutional level and requires an understanding of both the micro-foundations and macro-observables, as well as the relations between them. This manuscript, as a whole, addresses the meso-instutional perspective as a keystone in the coherent synthesis of macro and micro perspectives on cryptoeconomics through the observation that automation in socioeconomic systems is tantamount to algorithmic policy making."

More information

• Crypto Economy ; Cryptoeconomy
• Report: Foundations of Cryptoeconomic Systems