Blockchains are fascinating and distinct from other innovations because of cryptoeconomics. This feature stands out because it combines cryptography, computer science, networking theory, and economic incentives in a unique way. As a result of Satoshi's white paper, we can now create new types of technologies. Blockchain is a unique consequence of these crypto-economic processes, capable of achieving achievements that these disciplines do not accomplish on their own.
Both crypto-economics inventions, such as Bitcoin, Etherium, and Zcash, are specifically based on constructing various solutions.
Crypto Economics
Cryptoeconomics is a field of study that focuses on the creation and analysis of protocols that regulate the production, distribution, and consumption of goods and services in a decentralized digital economy. As the name implies, crypto-economics is built on two pillars:
Cryptography
Economics
Cryptography is the science of translating data into a secure format in order to protect it. This method, also known as encryption, is often used to prevent unintended recipients from reading handwritten messages. Cryptography is now widely used to protect digital data. It's a branch of computer science that focuses on translating data into formats that are incomprehensible to unauthorized users.
Economics is a social science that aims to meet needs and wants through development and distribution of high-quality services. In this set, there are three types of structures that could be classified as "crypto-economics."
Consensus protocol
The consensus protocol is a fault-tolerant framework used in computer blockchain systems to reach required agreements on a single network state or an accessible data value, such as in the case of cryptocurrencies. Proof-of-work is the method for achieving consensus on a blockchain. Many common cryptocurrency networks, like bitcoin and litecoin, use this popular consensus algorithm.
The Proof of Stake algorithm is a lower-cost alternative to PoW, providing a low-energy method for crypto transaction confirmations. This algorithm allows for the distribution of responsibility for the proper management of all blockchain processes based on the distributed digital currencies. However, one disadvantage of the process is that it encourages crypto saving rather than spending.
Other consensus algorithms, such as PoC, allow contributing nodes on the blockchain network to share memory space. The more hard disk or memory space a node has, the more public ledger rights it has authorization for.
Crypto economic application design
Once blockchains have solved the consensus problem, they can easily create applications that run on them. Cryptoeconomics can also be applied to the development of initial coin offerings (ICOs) and other token sales. This system architecture can be used in the context of auctions and token sales, for example.
Many blockchain applications, such as Metamask and Status, which enable users to connect to the Ethereum blockchain, are not crypto-economics items. Building these apps necessitates a thorough understanding of how rewards influence user behavior. As a result, they would have a better understanding of how to design economic processes that consistently deliver a specific result. You'll also need to know about the features and limitations of the underlying blockchain on which the software runs.
State channels
State channels are not applications; rather, they are a powerful technique that blockchain applications use to improve their performance. One disadvantage of blockchain implementations is that they are costly because sending transactions necessitates fees. Furthermore, as compared to other types of computation, using ethereum to run smart-contract code is comparatively expensive. State channels' main goal is to make blockchains more effective through advancing several processes off-chain while maintaining blockchain trustworthiness by crypto-economic architecture.
In the future, state channels can be used in some manner in virtually all blockchain applications; it's almost always a rigorous improvement that demands less on the chain's activity.
Conclusion
It's useful to look at the blockchain space through the prism of cryptoeconomics. If the concept is grasped, various parties will eventually resolve many of the industry's issues and debates. Crypto-economic consensus protocols that do not depend solely on a chain of blocks are likely to emerge. Similarly, such technology would have some similarities to blockchain technology, but calling them blockchains would be misleading.
However, rather than a blockchain, the coordinating principle is if such a protocol is the product of crypto-economics. Understanding the design process of a project holding an ICO is critical in assessing a token's utility and potential benefit.
We've stepped away from seeing and considering this emerging area exclusively through the prism of one technology, Bitcoin. Now is the time to consider a more critical approach to solving crypto-economics problems.