Cryptoeconomics

Cryptoeconomics is an evolving economic paradigm for a cross-disciplinary approach to the study of digital economies and decentralized finance (DeFi) applications.^[1]^[2]^[3] Cryptoeconomics integrates concepts and principles from traditional economics, cryptography, computer science, and game theory disciplines.^[4] Just as traditional economics provides a theoretical foundation for traditional financial (a.k.a., Centralized Finance or CeFi) services, cryptoeconomics provides a theoretical foundation for DeFi services bought and sold via fiat cryptocurrencies, and executed by smart contracts.

Definitions and goals

The term cryptoeconomics was coined by the Ethereum community during its formative years (2014-2015),^[5]^[6] but was initially inspired by the application of economic incentives in the original Bitcoin protocol in 2008.^[7] Although the phrase is typically attributed to Vitalik Buterin, the earliest public documented usage is a 2015 talk by Vlad Zamfir entitled “What is Cryptoeconomics?”^[8] Zamfir's view of cryptoeconomics is relatively broad and academic: “… 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”. Alternatively, in a 2017 talk, Buterin's view is more narrow and pragmatic: “… a methodology for building systems that try to guarantee certain kinds of information security properties”.^[9]

According to Binance, the primary goals of cryptoeconomics are to understand how to fund, design, develop, and facilitate the operations of DeFi systems,^[10] and to apply economic incentives and penalties to regulate the distribution of goods and services in emerging digital economies.

Cryptoeconomics may be considered an evolution of digital economics, which in turn evolved from traditional economics (commonly divided into microeconomics and macroeconomics). Consequently, traditional economic concepts regarding production, distribution, and consumption of goods and services also apply to cryptoeconomics. For example, these include Adam Smith's three basic laws of economics: Law of Supply and Demand, Law of Self Interest, and Law of Competition.^[11] They also include more modern economic concepts, such as fiat money theory and Modern Monetary Theory.

History

The historical roots of cryptoeconomics can be traced to the rise of altcoins, prominent among them the Ethereum project, which in 2015 pioneered the integration of smart contracts into its blockchain, thereby enabling a wide range of DeFi applications.^{[citation needed]}

Subdisciplines

Similar to how traditional economics is divided into macroeconomics (regional, national, and international economics) and microeconomics (individual and enterprise economics) subdisciplines, cryptoeconomics can be divided into crypto-macreconomics and crypto-microeconomics subdisciplines.

Crypto-macroeconomics

Crypto-macroeconomics is concerned with the regional, national, and international regulation of cryptocurrencies and DeFi transactions. The Group of Seven governments' interest in cryptocurrencies became evident in August 2014, when the United Kingdom Treasury commissioned a study of cryptocurrencies and their potential role in the UK economy, and issued its final report in January 2021.^[12] In June 2021, El Salvador became the first country to accept Bitcoin as legal tender.^[13] In August 2021, Cuba followed with a legal resolution to recognize and regulate cryptocurrencies such as Bitcoin.^[14] However, in September 2021, the government of China, the single largest market for cryptocurrency, declared all cryptocurrency transactions illegal, completing a crackdown on cryptocurrency that had previously banned the operation of intermediaries and miners within China.^[15]

Crypto-microeconomics

Crypto-microeconomics is concerned with the individual and enterprise usages of cryptocurrencies and DeFi transactions. A strong majority of USA adults have heard about major cryptocurrencies (Bitcoin, Ether), and 16% say they personally have invested in, traded, or otherwise used one.^[16] More than 300 million people use cryptocurrency worldwide, and approximately 46 million Americans have invested in Bitcoin.^[17]

Criticisms and controversies

Bitcoin, along with other cryptocurrencies, has been described as an economic bubble by many economists, including Robert Shiller,^[18] Joseph Stiglitz,^[19] Richard Thaler,^[20] Paul Krugman,^[21] and Nouriel Roubini.^[22] In addition, Bitcoin and other cryptocurrencies have been criticized for the amount of electricity required for cryptocurrency “mining” (blockchain transaction validation),^[23] and for their being used to purchase illegal goods.^[24]^[25]

References

^ "MIT Cryptoeconomics Lab". MIT Sloan. Archived from the original on 2022-06-22. Retrieved 2022-08-07.
^ "Cryptoeconomics - Wikiversity". en.wikiversity.org. Retrieved 2022-08-07.
^ Brekke, Jaya Klara (2021). "Hacker-engineers and Their Economies: The Political Economy of Decentralised Networks and 'Cryptoeconomics'". New Political Economy. 26 (4): 646–659. doi:10.1080/13563467.2020.1806223.
^ Berg, Chris; Davidson, Sinclair; Potts, Jason (2019). Understanding the Blockchain Economy: An Introduction to Institutional Cryptoeconomics. Edward Elgar Publishing. ISBN 978-1-78897-500-1.
^ Brekke, Jaya; Alsindi, Wassim (2021). "Cryptoeconomics". Internet Policy Review. 10 (2). doi:10.14763/2021.2.1553. S2CID 242297787.
^ Nabben, Kelsie (2023). "Cryptoeconomics as governance: an intellectual history from "Crypto Anarchy" to "Cryptoeconomics"". Internet Histories. 7 (3): 254–276. doi:10.1080/24701475.2023.2183643.
^ Nakamoto, S. (2008). "Bitcoin: A Peer-to-Peer Electronic Cash System" (PDF). Bitcoin.org.
^ What Is Cryptoeconomics?, retrieved 2022-08-06
^ Introduction to Cryptoeconomics - Vitalik Buterin, retrieved 2022-08-06
^ "A Beginner's Introduction to Cryptoeconomics". Binance Academy. Retrieved 2022-08-05.
^ "Who Was Adam Smith?". Investopedia. Retrieved 2022-08-05.
^ "UK regulatory approach to cryptoassets and stablecoins: Consultation and call for evidence" (PDF). HM Treasury. Retrieved 1 October 2021.
^ "Bitcoin legal tender in El Salvador, first country ever". Mercopress. 10 June 2021.
^ "Cuba's central bank now recognizes cryptocurrencies such as bitcoin". CNBC. 27 August 2021.
^ "China declares all crypto-currency transactions illegal". BBC News. 24 September 2021. Retrieved 24 September 2021.
^ Andrew Perrin. "16% of Americans say they have ever invested in, traded or used cryptocurrency". Pew Research Center. Retrieved 2022-08-06.
^ "Cryptocurrency Statistics 2022: How Many People Use Crypto?". 2022-08-04. Retrieved 2022-08-06.
^ Shiller, Robert (1 March 2014). "In Search of a Stable Electronic Currency". The New York Times. Archived from the original on 24 October 2014.
^ Costelloe, Kevin (29 November 2017). "Bitcoin 'Ought to Be Outlawed,' Nobel Prize Winner Stiglitz Says". Bloomberg. Archived from the original on 12 June 2018. Retrieved 5 June 2018. It doesn't serve any socially useful function.
^ "Economics Nobel prize winner, Richard Thaler: "The market that looks most like a bubble to me is Bitcoin and its brethren"". ECO Portuguese Economy. 22 January 2018. Archived from the original on 12 June 2018. Retrieved 7 June 2018.
^ Krugman, Paul (29 January 2018). "Bubble, Bubble, Fraud and Trouble". The New York Times. Archived from the original on 4 June 2018.
^ "Bitcoin biggest bubble in history, says economist who predicted 2008 crash". TheGuardian.com. 2 February 2018. Archived from the original on 12 June 2018.
^ Huang, Jon; O'Neill, Claire; Tabuchi, Hiroko (3 September 2021). "Bitcoin Uses More Electricity Than Many Countries. How Is That Possible?". The New York Times. ISSN 0362-4331. Retrieved 16 January 2022.
^ "Monetarists Anonymous". The Economist. The Economist Newspaper Limited. 29 September 2012. Archived from the original on 20 October 2013. Retrieved 21 October 2013.
^ Ball, James (22 March 2013). "Silk Road: the online drug marketplace that officials seem powerless to stop". theguardian.com. Guardian News and Media Limited. Archived from the original on 12 October 2013. Retrieved 20 October 2013.