Basic knowledge – Part 01
If you are a person who is really interested in cryptocurrencies, there is always a need to delve deeper into them. And the economics of cryptocurrency is the part that I think you should be referring to and thinking more about, not just because the knowledge you get will also give you a better understanding of what a new economy is all about.
Note: Articles of the series “Basic knowledge for newcomers“Although it is only basic knowledge, the terms and the knowledge in them are relatively ambiguous for those first encountered. So grab a drink and clear your mind before you get ready to learn this new knowledge.
TABLE OF CONTENTS
- Why You Should Care About Cryptoeconomics
- Reasons and use cases
- Articles of Association and Cryptocurrencies
- The goals of the crypto economy
- Security model
- The two pillars of the crypto-economy
- Encryption tool
- Economic tools
- Attacks can penetrate the network
When outsiders look at the crypto market, they usually think of Bitcoin and other cryptocurrencies as a wild land: no rules, no social norms, just greed and usefulness. And it is these perceptions of the lack of law and order that make the crypto world even more intimidating for many people.
In reality, however, there are always rules for decentralized peer-to-peer (p2p) networks like Bitcoin. These rules are codified in protocols and provide a common framework for the interaction between network participants. They help us create a safe, reliable and valuable system that, together with the law, creates a new framework for a better society.
To understand how complex and valuable these decentralized P2P networks are, we need to understand some basic crypto-economic concepts behind them. And when you understand these basic concepts better, you will understand why the advent of cryptocurrencies is more than just hype.
Everyone knows that cryptography and economics are both well-established academic disciplines and have evolved over the centuries, but when it comes to crypto-economics it is clear that this is still the case. It’s too young, around 10 years old (since Bitcoin was born).
As this is an emerging field, it is constantly evolving and of course there is no solid academic qualification that can prove that the knowledge learned will no longer apply in the future. I am writing this because I want to learn more about the design processes of Bitcoin or other cryptocurrency networks myself. There are lots of great articles or courses online now, but it takes a while to go through them and put the information together, if you’re interested you can find it at the end of the References section.
2. REASONS AND APPLICATION
Even if you’ve never heard of a decentralized p2p network, you’ve probably used it
used more or less by earlier forms of file sharing sites like Napster or BitTorrent. Put simply, they are systems in which people interact with each other and share values.
Value can be anything that we summarize as valuable, such as a material or a service. Most people would think that fiat currency is valuable because it is widely accepted or because we believe in its stability and longevity and have the power to spend it. . Today even cryptocurrencies like Bitcoin fulfill part of this role, and in some countries it plays a very important role.
If you dig deeper, you will find that these systems are designed just like our nations, governments, and democracies. But it is also different from our countries, decentralized P2P networks are designed by writing code in the logs. We trust the code (the network), not the government.
How we design these protocols affects how we interact with each other and how much value we can create and share from them. Ultimately, the crypto-economy lays the foundation for everything that happens in these decentralized P2P networks.
In designing protocols, we will make certain assumptions about how protocols are used and how they should not be used. We (the projects) try to use these assumptions to maximize the value of the system to the participants who support the network.
Imagine this: when we in society have no rules and people just like to do what they want. And if that really happens, then this is no longer a society. It is like what Thomas Hobbes described life as “the primal state of nature in which every person is a loner, impoverished, dirty, brutal and small”.
Just like in real life, we want our networks to offer value, security, and help us thrive as a group. The most fundamental goal of a decentralized P2P network is not only to add value, but also to increase maximum security and durability. Maximizing the security of the network is almost like doing the government to their own country.
In most countries, security is ensured by a state monopoly over the police and the military. These forms serve to maintain security and order and thus the value of our society for the people who live in it.
For example, the state enforces the law by allowing you to punish you, if you break the law (or not), it is made possible by its ability to use force against you (e.g. handcuffs or imprison you). So when you become part of society, you are giving up some power in favor of a better society. You do this because you believe that government and the systems it creates actually provide more security and value than leaving the forest on your own. Of course, this is all theory, because in practice most of us do not actively choose to live in a particular country, but are born into it.
In the crypto world, programmed protocols that enforce the rules in decentralized p2p networks guarantee value and security. This is exactly what decentralized P2P networks offer:
- Nobody can force you to join. The choice is yours.
- No central authority (like the government) can abuse its power (think of the terrible things corrupt and unethical governments have done like genocide, slavery, discrimination, etc.).
- No physical force is used to get participants to abide by the rules.
- They trust that open source will give you security.
The question then arises as to which rules and incentives are in place to build and maintain a valuable and secure network. This is exactly the question the crypto-economy tries to answer.
Now that we’ve laid the foundations for our understanding of why cryptoeconomics matters, why it exists, and why you should care about it, let’s dive into a slightly more practical matter.
First, we need to understand the more specific goals we want to achieve through crypto-economics.
The goals of a decentralized p2p network are to a high degree security and added value. To be precise:
- Trusted execution (you can trust your transaction to go ahead)
- Open access (everyone can access and read the code, nothing is blocked for the privileged few)
- Fast transactions (transactions are executed quickly and cannot be canceled)
- Decentralized control (no central authority that controls the protocol and the network)
- Inexpensive (encourages multiple transactions)
Things We Must Avoid:
- Security flaw (e.g. someone stole your token)
- Censorship (e.g. someone decides that a certain group of people are not allowed to do business)
- Slow transaction
- Centralized control (as opposed to decentralization)
At a deeper level, these goals can be achieved by:
- Convergence (one block goes over the other and stays true to the chain in the blockchain)
- Data availability (open access facilitates decentralization)
- Accredited (every transaction is valid to avoid double spending)
- Availability for everyone, corresponds to the censorship resistance of the network
- Timestamp (helps identify a blockchain, transaction validity, and more)
- Better performance on some crypto security models
The security model in the crypto economy is an important basic concept. These security models are fundamental to the design of a decentralized p2p network.
Security models are assumptions …