by Daniel Bennett on March 13
I am talking about crypto economic systems.
The most popular of which are Bitcoin and Ethereum
The specific part of these systems that applies cryptoeconomic theory is Consensus Protocols.
Both Bitcoin and Ethereum implement the proof of work algorithm to reach consensus for each block. Miners on the network compete to be the first to solve a cryptographic puzzle in exchange for a token representing some economic reward.
The amount of mining power on the network also provides security for data on the network as the cost of launching a 51 percent attack increases with mining power. Consensus protocols can also be implemented using different algorithms such as proof of stake.
Where the function of the protocol stays the same to help the network reach consensus. Proof-of-stake is looking to provide a faster energy efficient way of helping a network of peers agree on blocks. But is still based on cryptoeconomic theory.
Bitcoin and Ethereum are popular examples of base layer protocols that use cryptoeconomics. More examples of cryptoeconomic systems are some applications built on top of blockchains, like ethereum. The underlying blockchain provides a unit of value in this case ether, to enable developers to create incentives, as well as smart contracts to define logic around these incentives. An example of an application that is built on ethereum that uses crypto economic concepts is the prediction market Auger.
Auger creates a system of incentives for people to report some data to the application honestly, like the current temperature in Toronto, uses this data to settle bets in the predictions market, many industries will be reshaped with wider adoption of cryptoeconomic systems.
As we saw with Bitcoin for example the transfer of money between two people in any part of the world became as easy as sending an email. This poses a challenge for banks and payment processors as cryptocurrencies enabled borderless commerce on the internet. The way governments and businesses are organised will become more decentralised as well.
The first example of that was the DAO, or decentralised Autonomous Organisation. You can think of the Dao as a crowd-sourced VC fund, where anyone in the world could invest Ether in the DAO to become an investor aand vote for which investments to put in the fund. There were no employees in the DAO as there are with traditional organisations only investors from around the world. Even though the code for the DAO ended up having a vulnerability, it demonstrated a decentralized way of governing an organisation, which can be applied to almost any business or government. Cryptoeconomics has already begun to change the way organisations are financed. As we saw during the summer of 2017, with a record amount of funding raised through ICOs, or Initial Coin Offerings. An ICO allows anyone to crowd-source funding for their idea using Ether.
I will conclude on cryptoeconomic applications next time
Cryptographic or secret writing has been around since 1801.