At A Glance – Cryptoeconomics

The economics of cryptocurrencies, or a new economic model? Neither.

It may sound strange, but cryptoeconomics is not the economics of cryptocurrencies, and neither is it a subfield of economics. Instead, it is an interdisciplinary method of designing certain systems by combining cryptography and economic incentives. Cryptoeconomics is often described in conjunction with mechanism design, which is the economic study of mechanisms to incentivise actions.

Given its name, cryptoeconomics is largely associated with cryptocurrencies. Bitcoin and Ethereum, the two largest digital currencies, are based on cryptoeconomics. Cryptography plays a central role in providing secure and exclusive control to verified users. Economic incentives are set up to encourage users to act in a way that benefits the system. In other words, constructive participation (like creating blocks) is rewarded with the currency itself, but malpractice can lead to penalties. However, not all blockchain applications are the result of cryptoeconomics, and cryptoeconomic systems are not confined to blockchains.

Cryptoeconomics is a practical science that uses cryptography to design rules based on economic theory. As a holistic approach, it reflects the merging of disciplines to solve problems. Cryptoeconomic systems should be viewed as distinct from cryptocurrencies, despite playing a fundamental role in how many are designed. As more data is exchanged digitally, cryptoeconomics could provide a secure and logical framework for creating productive B2B, B2C and P2P transactions.

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