Cryptoeconomics - For Dummies


Original translation: https://medium.com/@j32804/cryptoeconomics-for-dummies-part-0-7172efa81507

Perhaps it would be more appropriate to call this article cryptoeconomics for dummies written by dummies. Because the content has been simplified quite a bit. The reason why I decided to write this article is because after several years of study, it stands to reason that now I should be preparing to write my undergraduate thesis. But I'm not an undergraduate, and I don't have a so-called undergraduate major in cryptoeconomics.

Everyone is a beginner when it comes to cryptoeconomics. But there are also beginners among beginners.

At the end of 2015, the core developer and researcher of Ethereum, who is also a self-proclaimed bull, [Vlad Zamfir] (https://medium.com/@Vlad_Zamfir), gave a speech on cryptoeconomics, so far the video Played only 600 times. If you want to get started and get rid of the novice title, you can watch his video. Vlad and Vitalik Buterin, along with other researchers, work on [Casper PoS Algorithm](https://github.com/ethereum/economic-modeling/tree/master/casper). Cryptoeconomics can be very useful for understanding the algorithms themselves. At the same time, it is also very useful for those who want to design and implement systems with a certain degree of autonomy (without relying on one entity).

> “Practice safe design of protocols and systems without centralised ownership — practice cryptoeconomics”

"Practices of secure design of protocols and systems free from centralized control—Practicing cryptoeconomics."

### Vanilla cryptoeconomics

Cryptoeconomics comes in different kinds of flavors. In recent years, as the term has become more and more popular, the variety has become more and more, and even has its place on Wikipedia, it has been weakened, defined, and redefined. It's great again among the rare dank memes.

Now Vlad Zamfir defines it as:

> “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.”

“It is 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 designing and describing these protocols.”

There is also a shorter and deeper definition on the Ethereum Github [Wiki](https://github.com/ethereum/wiki/wiki/Problems) (which I like):

> “the study of economic interaction in an adversarial environment”

> "Research on Economic Interactions in Adversarial Environments."

I will try to use my own words and reverse logic to understand and explain its working mechanism, and go deeper.

> “One of the things it does is helping to design a system of incentives and counterincentives in a way that when this system is implemented without any central authority to keep it in check it doesn’t all go to shit.” It is called crypto because the underlying protocols you build this system on use cryptography, not because it is cryptic”

“Cryptoeconomics helps to design a system of incentives and disincentives that can function without any central authority oversight and still keep moving forward. It’s called crypto because of the foundation you build on. The protocol is a system based on cryptography, not because it is inherently stealthy.”

An autonomous economy can be designed on Ethereum using cryptoeconomics, which would be very effective as it involves social, technical and interaction at the same time. It's also very soothing, allowing you to relax from two completely different levels, social and technological, when dealing with cryptoeconomics.

Cryptoeconomics is largely game theory. The point of it is to tell everyone that not everyone is nice, not that everyone isn't good. Last week, Vitalik mentioned in his introductory talk on cryptoeconomics that it is normal for at least 15% of the network to be honest. In my understanding, 15% may not be good, but at least we can be sure that they are not all crap.

## When not to use cryptoeconomics?

“Don’t use cryptoeconomics at home. The same goes for blockchain. If you have a family that needs cryptoeconomics, move out.”

I do not recommend using cryptoeconomics with friends to design communication protocols. You can go with a partner, but it may be quite a test for your relationship. If things aren't going well, switch partners or stay on your own for a while. Often, cryptoeconomics is used in place of trust mechanisms, when we cannot measure trust mechanisms, and in unfriendly environments, such as when everyone wants to command the other.

Other ways to understand cryptoeconomics, aside from game theory, I find it easier to look at cryptoeconomics through the lens of actor network theory. Actor-network theory is often concerned with equal treatment between humans and non-humans. It believes that all independent individuals in this network can and should be treated equally. It saves you time not thinking about who is human and who is not, but how they interact with each other. (People now generally think humans are more evil than non-humans, but I don't know why).

Another useful tool for understanding cryptoeconomics is [cybernetics](https://en.wikipedia.org/wiki/Cybernetics), which is commonly used to study regulatory systems, as defined by Norbert Wiener The Scientific Study of Control and Communication in Animals and Machines", including structure, limitations and possibilities. The control wheel is primarily focused on the feedback collection mechanism, rather than decentralization. Crypto-economists, on the other hand, focus on both autonomous economies and governance systems. Interestingly, cybernetics have been trying to implement something similar since the 60s and 70s (eg OGAS in the former Soviet Union and Cybersyn in Chile) (interestingly, Raul Espejo, the former director of operations for the Cybersyn project, said in his [talk](https://www.youtube.com/watch?v=JGTEoJI5-Y4&feature=youtu.be) mentioned that the main problem with Cybersyn is its hierarchical structure - central planning applied to participatory democracy)

> Hoodo magic — for every hoodoo there is an antihoodo.

Interaction in a bad environment without bad third parties, back to definition. If we call the adversarial environment in which economic interaction occurs a bad environment, because I like to define and explain things by imagining different attack vectors. This is my second favorite view in cryptoeconomics, after the evil dystopian cryptoeconomics (which I will discuss in a future article). So you can use cryptoeconomics to figure out how to build a system maintained by actors (human, machine, or otherwise) and make it nearly impossible for the outside world to lethally attack your autonomous system.

In my opinion, in most design cases, the attack is very expensive (but not always). You want to make sure that honest and effective participation is rewarded. So it makes more sense to be friendly. It kind of works if you assume that all actors are rational. But you should do better. I'm not sure, so I asked Vitalik Buterin if cryptoeconomics assumes that all participants are rational, and he answered no. I haven't looked into how to deal with irrational actors in cryptoeconomics, but I'll keep it for the first part. It just means that cryptoeconomics is not just a decentralized system of carrot and stick (hard and soft) rewards. This is just a basic feature.

> Stick, carrot, carrot on a stick. Carrot on a carrot on a stick on a carrot on a stick.

Let's stick to vanilla cryptoeconomics, throw away all the crypto languages in it first, assuming we have a lot of rational actors, and see what kind of decentralized communication protocols we can build with carrot and stick incentives. You can build The Incredible Machine [The Incredible Machine](https://en.wikipedia.org/wiki/The_Incredible_Machine_(series)#Gameplay) using nothing but carrots and sticks.

> Size of sticks an carrots matters

Someone told me a story about how to attack a country's communications infrastructure - the country's borders start buying copper at ridiculously high prices, and wait until the country's citizens have dug up all the copper cables and sold it to you. In the end, you'll be harvesting piles of unwanted copper, costing a lot of money, but probably less expensive than other attacks. By the way, you also need to buy fiber optic cables.

(Another stupid example of legitimizing a 51% attack by a democratic majority vote, but that also exists in a collapsing cryptoeconomy)


Yes, no encryption is involved in these examples. But that's not important for this article. Over the weekend, my team members and I discussed a trivia about the crypto-economics, and in that context, let's use the cow as an example:

Cows can produce milk, so rational actors wouldn't kill it, but if the cow is big and looks delicious, some people might want to eat it. You know what, I absolutely will, because I'd rather eat steak right now and then think about what to eat later than drink milk until I die. That really sucks.

If you genetically alter your cow so that it tastes bad, I'll be less likely to attack your cow.

If you genetically altered the cow so it tasted like canned spinach or cold pasta, I wouldn't touch it. I'd rather drink hot milk for the rest of my life.

But you can be sure that for some people who like cold pasta will kill and eat your cows.

Or someone who hates cows.

Or someone who hates cows so much that he'd pay a lot of money to anyone who loves milk to help him kill this poor cow. Then came the whole market of cows.

To counter this, you can make sure to involve certain heavily milk-addicted vegetarians in the system, and if something happens to the cows, they create an assassination market for all meat eaters.

This is just a small example of the incentive vs. disincentive problem, and I could go on and on (in that particular example we did figure out something).

When it comes to decentralized systems and related protocols, because you don't have a trusted person to take care of the cows, you can only buy milk from him. What if this guy has no credit whatsoever and decides to eat a whole cow all by himself. This sort of thing happens all the time, so you're just trying to build an unstoppable global multi-user cow, with no central authority, not at all.

This is very important in a decentralized system because what we're trying to do here is get rid of a third party, a third party that might make sure the system doesn't crash. Here I quote some people who study information security:

"There are no trusted third parties."

(can't remember who said that)

Cryptoeconomics is more than incentives and disincentives, because sticks and carrots only work for rational actors. We cannot assume that everyone is rational, not even squirrels. But I think that incentivizing/de-incentivizing and defending against attacks is enough for this article.