BLOCK CHAIN TECHNOLOGY

ASSIGNMENT ON

CRYPTO ECONOMICS
WHAT IS CRYPTO ECONOMICS?
The analysis of economic interaction in adversarial environments relates to cryptoeconomics.
The fundamental problem is that there will be bad actors trying to undermine the process in
distributed P2P networks that don't give control to any hierarchical entity. Cryptoeconomic
solutions combine cryptography with economics to create stable distributed P2P networks
that develop over time despite adversaries trying to disrupt them.
Before the advent of Bitcoin, it was commonly believed to be impossible to achieve fault-
tolerant and attack resistant consensus among nodes in a P2P network (Byzantine General’s
Problem). Satoshi Nakamoto introduced economic incentives to a P2P Network and solved
that problem in the Bitcoin White Paper published in 2008. While decentralized P2P systems
based on cryptography were nothing new – see Kazaa and BitTorrent – what these P2P
systems before Bitcoin lacked was the economic incentive layer for coordination of the
network of participants. Satoshi’s implementation of a Proof of Work (POW) consensus
mechanism introduced a new field of an economic coordination game, now referred to as
cryptoeconomics.

HOW DOES IT WORK?

A holistic model of cryptoeconomics is the cryptoeconomic circle. It was published by Joel 
Monegro and illustrates abstract value flows in such a peer-to-peer economy through various 
participant classes.

The model represents a three-sided market between miners (offering side), users (demand
side) and investors (capital side). Each group uses a scarce cryptoeconomic asset (a token) to
exchange value between each other.
Miners are paid for their work in the circle's miner-user relationship by tokens used by the
users. This system is regulated by the consensus protocol of the network, while the
cryptoeconomic model governs when and how miners are compensated.
It is beneficial to build a network architecture assisted by a decentralized supply side (miners)
as long as the benefits outweigh the disadvantages. Also, the advantages include resistance to
censorship, borderless payments, and improved reliability. But when compared to
hierarchical models, distributed systems tend to have lower performance.
In this model, the investor's task is twofold: to provide liquidity to the miners to sell their
tokens, and to leverage the network by supporting token prices above mining costs.
The model illustrates both of these roles by dividing investors into two groups: traders (short-
term investors) and hodlers (long-term investors). 
Traders create liquidity for the token so miners can sell their mined tokens and cover
operational costs, while holders capitalize the network for growth by supporting token prices.
The miner-trader relationship works with a direct flow of value, while the miner-holder
relationship works with an indirect flow of value. 
This simply means that all those participating in such an economy rely on each other in order
to achieve their economic goals. Such a model provides a stable, robust network. Compliance
with the incentivized ruleset is more valuable for the individual user than malicious activity-
making the network more robust in turn.

GROUP PERSPECTIVE
While a relatively new idea originated with Bitcoin's conception, cryptoeconomics is an
important building block to be considered when designing distributed networks.
For each participant class, isolating the different roles in cryptoeconomic models helps to
examine price, rewards, and value flows. It can also help to think about relative power and
identify potential centralization points that are important for designing more balanced models
of governance and token distribution.
During the development of future networks, the cryptoeconomic field and the use of
cryptoeconomic models can be highly beneficial. By studying cryptoeconomic models that
have already been tried and tested in live environments, future networks can be designed to
be more efficient and sustainable, resulting in decentralized economies being more robust.
 REFERENCES

 https://www.coindesk.com/announcing-the-coindesk-crypto-economics-
explorer
 https://www.binance.vision/economics/a-beginners-introduction-to-
cryptoeconomics