Introduction to Cryptoeconomics

Introduction to Cryptoeconomics

Cryptoeconomics has been defined by some as a discipline that studies rules that regulate the production, dispersion, and consumption of products in a decentralized digital economy.

The fundamental principles governing Cryptoeconomics are cryptography and economics. Simply put, the combination of these two concepts is what forms Cryptoeconomics.

Cryptography
Cryptography is the method used in securing communications. It encompasses the encryption of messages and ensuring that the messages are not meddled with.

An important function involved in cryptography is the “Hash function”.

A Hash function is a kind of function where an algorithm outlines the information of any input and produces an output with a specific size.

Examining the input and output of a Hash enables the user to deduce if a file has been meddled with. Hence, the primary function of a Hash function is to guarantee information legitimacy.

Economics
Economics is an area of social science involved with the creation, consumption, and transfer of wealth. There is a vital economic characteristic in the method blockchains operate in known as “consensus mechanism”.

Consensus Mechanisms
Blockchain-based systems do not have a governing body. This quality ensures that the system’s data records cannot be accessed or manipulated by a third party. A blockchain can maintain its secure and tamper-free nature if it has an adequate consensus mechanism.

Some widespread consensus mechanisms include:
Proof of Work. In this method, miners validate transactions on the network.

Proof of Stake. In this method, instead of miners, it had custodians who have their coins invested and are responsible for validating transactions.

Delegated Proof of Stake. This method functions as a democratic government of sorts in the network to ensure security and legitimacy.

Characteristics of a Digital Asset With Adequate Cryptoeconomics
Listed below are some characteristics that a digital asset with adequate Cryptoeconomics should possess:

It must be blockchain-based.
It has to have open access to everyone.
It must be decentralized.
It must finalize transactions speedily.
It must be cheap.

Final Note
It cannot be said for sure what the future of Cryptoeconomics is but it can be said that this system is looking more and more like a replacement for traditional economic systems.

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Author : Azeez Mustapha

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Azeez Mustapha is an experienced author, trader, markets analyst, signals strategist, and funds-manager.