Cryptoeconomics = Social Engineering

This is the TL;DR version of a longer article I’m writing that delves into what crypto-economics really is.

Just so you’re aware, its probably the single most important study into the value proposition of this new field of blockchain / cryptocurrencies & crypto assets.

If you’re in the space, if you’re investing, trading, writing, coding, marketing, or whatever, you should have at least a basic grasp on what it is (and what it’s not).

There are a lot of great thought leaders & researchers in this area who I’d recommend you read up on — my articles are simplified versions designed to help people with less technical bacgrounds get a grasp on what’s going on.

Couple of notables:

• Vlad Zamfir
• Vitalik Buterin
• Chris Burniske
• Fred Ehrsam

**Also Note**

When I refer to social engineering in this article, I don’t mean the evil, 1984, big brother, authoritarian version. I mean more the study of designing systems that societies and their inhabitants operate within.

Moving along….

Cryptoeconomics. WTF???

At first glance, you would assume that it’s the study of economics in the world of “cryptocurrencies”.

If that’s what you thought, you’d be off the mark. But don’t worry — it’s what most people think initially.

Cryptoeconomics is far more fundamental than that. It’s the study of the internal mechanisms that govern the operation of decentralised consenus systems. (I know..that’s mumbo jumbo..but I’ll clear it up below).

It’s basically what makes the new decentralised blockchains tick, and what gives alot of the (more reputable) crypto-assets ‘real value’.

But, before I explain what it is….

What’s it not?

Cryptoeconomics is not a subfield of “economics” as we know it.

Cryptoeconomics is not the application of macroeconomic and microeconomic theory to cryptocurrency or token markets.

There is no parallel “crypto version” of Economics.

Meanwhile…in a parallel universe..So what is it?

It’s more like social engineering. (minus the manipulation, etc.)

Think of it as our latest evolution ingovernance, ie; Tribes → Kingdoms → Nations → Free Markets → Decentralised Blockchains(Crypto).

Societies are built on systems of governance, which at a foundational level are ‘rules’ along with a ‘means of communication’.

Each stage has it’s own systems, processes, means of exchange, and up until now; a trusted intermediary for exchange.

Decentralised blockchains leverage cryptoeconomics to govern exchange.

Cryptoeconomics, through the combination of a number of different disciplines, basically allows us to create systems of communication and exchange without the need for a trusted (or central) authority / arbiter / facilitator.

And that’s what’s so revolutionary about it.

It takes a bunch of disparate sciences & disciplines, combines them all together, adds the power of the internet (ie; the modern communication medium) and out comes Bitcoin, ZCash, Ethereum, Dash & Monero, among many others..

Come Together

So how’d this all happen?

Well some genius, currently un-known as Satoshi Nakamoto decided to bring together a bunch of non-related disciplines and sciences to create this little known version of digital cash, ie; “Bitcoin”.

Those disciplines included:

• Cryptography
• Networking
• Computer science
• Game theory (and Mechanism Design)
• Economics (Choice, Incentives & Dis-Incentives)

and I would add:

• Human psychology (Self interest, Self preservation, Altruism)
• Social Engineering (Humans; interacting, communicating & doing ‘stuff’)

Traditionally, these areas of study had little to no cross-over (except elements of the top 3- 4 obviously) — and as such, experts in each went along doing their own thing.

Since Satoshi birthed Bitcoin though, the community has exploded and we’ve seen the emergence of many other decentralised protocols each with their own fundemental cryptoeconomic methods, models & systems of governance.

It’s definitely the place to be 2018 and beyond.

That’s not Satoshi…although it could be..My Rendition of the Definition

I’ll leave you with an excerpt from my longer article. Hopefully it will inspire you to delve a little deeper.

Cryptoeconomics is the study of economic interaction in adversarial / trust-less environments. It employs mechanism design (a.k.a reverse game theory) in order to engineer “systems” that remain robust & reach consensus, whether or not parties are known, unknown, trusted or not.

Cryptoeconimics was birthed with Bitcoin, and its necessity is borne from the fact that in decentralized peer to peer systems that do not give control to any third party, one must assume that there will be bad actors looking to disrupt, game or take advantage of the system.

So therefore, Cryptoeconomics combines cryptography, mechanism design and economic incentives / dis-incentives to create robust decentralized P2P networks that thrive over time despite adversaries attempting to disrupt the network.

The cryptography underlying these systems is what makes both the P2P communication within the networks and the integrity of the blockchain secure, whilst the economics is what incentivizes all actors to contribute to the network so that it thrives over time. The social engineering allows developers of the system to better understand how the users will behave within and outside of rational bounds. The more more the system can account for irrational behavior, the more robust it is.

In Closing

In simple terms, cryptoeconomics is the use of incentives and cryptography to design new kinds of systems, applications, and networks.

• Cryptoeconomics is specifically about building things, and has most in common with mechanism design — aka; reverse game theory.
• It’s a new field of “science”, that resides at the convergence of multiple, disparate technologies & disciplines, namely:

Cryptography, networking, computer science, social science, game theory & economics.

• Blockchains are just one product of this practical new science.
• Bitcoin, Ethereum and Zcash are all examples of “cryptoeconomic protocols”.
• Up until now there has always been a middle-man of sorts, that helps to facilitate transactions & communications that are of value.
• Crytpoeconomics gives us a way to bring exchange of value & communication together in a way that does not require a 3rd party, nor does it require trust amongst peers.

The aim of this write up was to help you understand how this revolutionary new discipline may sow the seeds for the next major revolution in governance, finance, exchange, communication, trust and more.

If you enjoyed this post, please show it some love. Give it a clap (or a few) and pass it around to anyone you think should have a read.

Some of my stuff is a little rough around the edges, but it’s done that way to hopefully jolt people into think clearer / deeper into what they’re doing.

Hope you got value out of this post!

Aleks

Cryptoeconomics = Social Engineering was originally published in The Mission on Medium, where people are continuing the conversation by highlighting and responding to this story.