Foundations of Cryptoeconomic Systems
* Report : Foundations of Cryptoeconomic Systems. By Shermin Voshmgir and Michael Zargham. WU Vienna, Working Paper Series 1/20
URL = https://epub.wu.ac.at/7782/1/Foundations%20of%20Cryptoeconomic%20Systems.pdf
Summary
"Blockchain networks and similar cryptoeconomic networks are systems, specifically complex systems. They are adaptive networks with multiscale spatio-temporal dynamics. Individual actions may be incentivized towards a collective goal with “purpose-driven” tokens. Blockchain networks, for example, are equipped cryptoeconomic mechanisms that allow the decentralized network to simultaneously maintain a universal state layer, support peer-to-peer settlement, and incentivize collective action. These networks represent an institutional infrastructure upon which socioeconomic collaboration is facilitated – in the absence of intermediaries or traditional organizations. They provide a mission-critical and safety-critical regulatory infrastructure for autonomous agents in untrusted economic networks. Their tokens provide a rich, real-time data set reflecting all economic activities in their systems. Advances in network science and data science can thus be leveraged to design and analyze these economic systems in a manner consistent with the best practices of modern systems engineering.
Research that reflects all aspects of these socioeconomic networks needs
(i) a complex systems approach,
(ii) interdisciplinary research, and
(iii) a combination of economic and engineering methods,
here referred to as “economic systems engineering,” for the regulation and control of these socioeconomic systems.
This manuscript provides a conceptual framework synthesizing the research space and proceeds to outline specific research questions
and methodologies for future research in this field, applying an inductive approach based on interdisciplinary literature review and relative
contextualization of the works cited."
Contents
"This paper explores why the term “cryptoeconomics” is context dependent and builds up to providing complementary micro, meso, and macro definitions (Section 9). These context dependent definitions are the synthesis of examinations of cryptoeconomic systems in terms of complexity (Section 2), interdisciplinarity (Section 3), institutional (Section 4), coordination (Section 5), emergence (Section 6), network structure (Section 7), and tokenization (Section 8). The final section (10) focuses on potential research directions and serves as an outlook rather than a conclusion. It identifies potential future research areas that build on the assumptions and definitions provided in this paper."
(https://epub.wu.ac.at/7782/1/Foundations%20of%20Cryptoeconomic%20Systems.pdf)
Excerpts
Shermin Voshmgir and Michael Zargham:
"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)
Cryptoeconomic Systems as Institutions with Social and Algorithmic Governance Feedback Loops
Shermin Voshmgir and Michael Zargham:
"The Internet is an institution, and a piece of cultural infrastructure from which many distributed Internet tribes have formed over time [Phillips 2000], first around the infrastructural layer of the Internet [Mueller 2010], and then on the application layer such as e-commerce platforms [Re 1997], [Zhu and Thatcher 2010], [Schmitz et al. 2002], knowledge platforms [Adams and Gordon 1989], or social media platforms. The institutional nature of the internet is underscored by the emergence of recognizable forms in self-organising communities as social activities migrate into digital spaces [Frey and Sumner 2019]. Though platform economies and associated network effects have driven the internet toward more centralized power structures, platform cooperativism demonstrates that digitalization, when wielded by communities, can be a force for democracy [Scholz and Schneider 2017].
Cryptoeconomic networks enable more fluid organizations to formalize over the Internet - around a specific economic, political, or social purpose - commonly referred to as a “Decentralized Autonomous Organizations” or “DAOs” by the crypto-community [Buterin 2014], [Wright and De Filippi 2015]. They reinvent the institutional composition of the Internet, allowing distributed Internet tribes to self-organize and coordinate in a more autonomous way - steered by purpose-driven tokens (read more on purpose-driven tokens in section 10.1). The network protocol and/or the smart contract code formalize the governance rules of the network, regulating and enforcing the behavior of all network participants.
As institutional infrastructure, cryptoeconomic networks resemble nation states much more than they resemble companies. Their protocols are comparable to the constitution and the governing laws of a nation state [Lessig 2009], in a combination of formal (on-chain) and informal (off-chain) rule sets. The network protocols and smart contract represent the computational constitution, while the adaptive social decision processes represent a body of values and rules which govern the collective decision-making process [Zargham et al. 2020], [Voshmgir 2020]. Cryptoeconomic networks provide an infrastructure that can change the composition and dynamics of existing institutions, since the use of such infrastructure can (i) reduce the principal-agent dilemma of organizations providing more transparency, (ii) disintermediate by reducing bureaucracy, and (iii) replace the reactive procedural security of the current legal system, with proactive and automated mechanisms that make a potential breach of contract expensive and therefore infeasible [Davidson, De Filippi and Potts 2016], [Voshmgir 2017], [Allen et al. 2020]. Contract theory and the notion of incomplete contracts are an important institutional aspect in this context and will be discussed in section 10.3 of this paper.
The institutional economist Thorstein Veblem described socioeconomic institutions as complex adaptive systems, stating that they ”are products of the past process, are adapted to past circumstances, and are therefore never in full accord with the requirements of the present” [Veblen 1973] and pointed out the need for a feedback mechanism to maintain an institutional integrity in the light of their complex adaptive nature. Walter [Hamilton 1919] also pointed out the complex nature of economic systems and ”claimed that institutional economics alone could unify economic science by showing how parts of the economic system related to the whole” [Hodgson 2000] and that ”economic theory must be based on an acceptable theory of human behaviour.”
(https://epub.wu.ac.at/7782/1/Foundations%20of%20Cryptoeconomic%20Systems.pdf)