Cryptoeconomics

 

Introduction: Todays Lesson Is Cryptoeconomics.

I will give each module a difficulty rating out of 5.

The fundamental principles #Blockchain is built on is Cryptography and Economics

#Cryptoeconomics What is a decentralised economy?

Identify cryptoeconomic properties of a blockchain.

Describe how cryptographic functions are implemented.

Explain how cryptography is used to reach consensus in a decentralised network.

Understand how the blockchain creates economic incentives through game theory.

 

Compare proof of work and proof of stake consensus protocols.

I will show you:

How will blockchain impact our lives and change the following indusries

Finance

Trading on the blockchain, decentralised ledgers, ICOs

Law

Smart Contracts

Commerce

How will blockchain change the structure of companies and organisations and as a result business models themselves.and as a result business models themselves.

 

Lesson One: Peer to Peer

Difficulty level 2

One of the things you’ll hear most about blockchains is that they are decentralised. This means no central authority.  This means nobody has overall control. Anyone can join and participate. Blockchain can use this by creating a peer to peer network. This is where two or more computers are joined together without going through  a centralised server. For example when sending an email to your friend on gmail. You actually send the email to Google – they send it on to you. When using a peer to peer network you can send directly.

A peer to peer network can be an adhoc connection when you connect your phone to your PC. Or can be a permanent structure in an office to link half a dozen PCs on a copper wire like a LAN.

Or a peer to peer network can be on a much grander scale where special protocols set up direct relationships among users. This is the kind of peer to peer network where the blockchain is. Bitcoin, Ethereum, and all other blockchains are essentially protocols. A protocol is different from a program in that  it just describes how the communication should work. There are different ways to implement it. We interact with protocols using clients.

Clients:  are programs that implement the protocol

Clients: communicate with other peers using the protocol.

Clients: your browser is the most common example of a client. It implements a protocol called http to communicate with other computers. Connected to the world wide web

Clients: are protocol specific each client is designed to only answer to one protocol. Geth and parity. Two commonly used ethereum clients can communicate with one another, despite being written in different programming languages. Because they both use Ethereum’s protocol. Neither of these clients , however can communicate with a Bitcoin client like Bitcoin core. Because bitcoins clients can only understand Bitcoins protocol.  Which is different to Ethereums.

Clients: In a peer to peer model each running instance of a client is a node, that is connected to every other node. They connect together to create the network. Which are other instances of clients with the same protocol. This is very different to the server model we looked at in our email model. Where all the clients are connected to a server instead of to each other. The server has powers whereas the clients do not.

Clients: Despite being a fairer network – Peer to peer networks can also offer a resilience that client servers cannot. Relying on centralised servers leads client server networks vulnerable to external attacks, like ddax. If hackers can compromise the central servers the entire network can be taken down. In a peer to peer network, however, hackers would have to find and take out every single node in the network. This is impossible to do because nodes are entering and exiting the network all the time.

Hackers are not the only problem. Centralised systems can also be coerced by governments or other forms of authority to shut down their network. This is what happened to Napster. A music sharing site. The entertainment industry was able to force the closure of napster.

In peer to peer networks, however,  nobody has the power to take down the network. Even if they wanted to. Look at  BitTorrent. They  did exactly what napster except on a peer to peer network. Its still being used today. Despite all the entertainment industries attempts to stop it.

For everything that they offer though, large scale peer to peer networks were not seen as a viable solution. Because nobody could ensure that the nodes would cooperate and perform the tasks that were needed to keep the system running effectively. How do you incentivize everyone  on the network to cooperate?  And you can see this problem with torrents even today. In a torrent system anyone can share files with a decentralised network. The idea was that people would download files and keep seeding or sharing the files with the network for others to download. But, this works on an honour system. If you were downloading a file, then, you were expected to see it as well. The problem is humans really are not the most honourable of creatures. And, without any economic incentives they make no sense for people to keep seeding a file which ate up their bandwidth took up unnecessary space on their computers. The worst that can happen in a torrent system, is that you can’t download your favourite sombre movie. But, imagine if your bank had to run on such a network, your transactions would never get processed, even if they did you couldn’t trust that the person processing them didn’t make a mistake or deliberately tamper with them. Ironically the same decentralisation that make peer to peer networks so powerful also prevented them from being used in a viable way. That is, until October 2008, when an unknown man, woman or group, calling themselves

Image result for satoshi nakamoto

Satoshi Nakamoto

 

Image result for satoshi nakamoto

released a paper that would reveal the foundations for Bitcoin. Commonly referred to as the Bitcoin whitepaper. Outlining how it would be possible to make a peer to peer electronic cash system using #Cryptoeconomics

This system differed from earlier peer to peer networks. Because it offered economic incentives to follow the rules. Nodes, would be rewarded for processing transactions correctly. And, punished if they tried to circumvent the system by tampering with past transactions or submitting an invalid transaction.

I will get into a lot more detail about how rewards work. For example how a builder of a block in the blockchain can be rewarded with upward of 10 BTC/£67,500

And punishments. How they work. And about how a system without any central authority can determine what is valid or invalid later in this course. What you need to know for now is:

The technology that makes blockchains possible is not particularly revolutionary in fact its been around since the late nineties. What is revolutionary about blockchains is the way they implement economic incentives using software to ensure that members of the network behave as expected even when there is no human there to monitor transactions.

“Tell Us Something We Don’t Know”

Image result for niloo ravaei

Thank You Niloo Ravei for doing so.

 

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