
Cryptoeconomics 101 - ntomaino
https://thecontrol.co/cryptoeconomics-101-e5c883e9a8ff
======
trunnell
It'd be cool to have digital cash, but I think we're decades away.

Unfortunately, it seems that cryptocurrency enthusiasts focus more on the
crypto than on the currency. To be taken seriously, there need to be realistic
approaches to things like monetary policy. The ungoverned money supply of
cryptocurrencies seems to be touted as a feature, but AFAICT, it's a fatal
bug.

Think of the money supply as the denominator and total addressable value as
the numerator; the goal with a stable currency is to keep the _ratio_ constant
over time (or as close as possible).

The fixed money supply of bitcoin is a joke. If the currency were successful,
bitcoin's fixed supply (a constant denominator) wouldn't keep up with global
growth (a growing numerator), which would make the currency more valuable over
time. This would result in a deflationary spiral (no one spends the money b/c
they're better off waiting and letting it appreciate, which leads to less
spending, which leads to even more deflation, etc.)

The etherium money supply is said to be TBD, but why would anyone be
optimistic? Consider the layers of analysis underpinning the last Fed
statement in May:

[https://www.federalreserve.gov/monetarypolicy/files/monetary...](https://www.federalreserve.gov/monetarypolicy/files/monetary20170503a1.pdf)

A) political philosophy (for the Fed, the goal is to maximize employment and
stabilize prices), B) macroeconomic understanding (for example, the
relationship between money supply and growth), C) economic data collection
(employment, prices, inventory, output, etc.)

That's incomplete, but consider: how much of that kind of thing is even
approached by any cryptocurrency community? Does anyone think the same kind of
extreme care taken by the Fed is going to be replicated?

When know-nothing articles like this one pass for news, well... let's just say
the emperor's naked.

~~~
monort
If bitcoin is the only world currency and money velocity is constant, it will
rise/fall by the same percent as the world economy. We already have a similar
financial instrument - Vanguard total world stock ETF. Why this ETF does not
produce a deflationary spiral? I think the answer is the same for bitcoin.

[https://personal.vanguard.com/us/funds/snapshot?FundId=3141&...](https://personal.vanguard.com/us/funds/snapshot?FundId=3141&FundIntExt=INT#tab=1)

~~~
yunyu
The velocity of index funds is far different from that of currency​. The
former doesn't even fulfill the requirements of currency, try buying a haircut
with that fund...

------
kneel
This submission is an ethereum pump article.

It has never made sense to have turing complete currencies. Ethereum will
continue to be a great idea in the short term and a terrible idea in the long
term.

~~~
Fej
Yeah, I got that vibe around

> I believe in 50 years, cryptoeconomics may be a discipline as widely studied
> as physics and Satoshi may be as widely revered as Galileo.

Holy cow. I stopped reading at that point. Did the author read that over
before publishing?

~~~
jacobush
I can easily imagine a dystopian future where basic sciences are no longer
taught and Galileo seems irrelevant and quaint compared to the everyday chores
one must do to avoid being repurposed as stock for the local Soylent Green
factory.

------
irln
An understanding of how to authenticate the blockchain and transactions is
obviously essential, however, I haven't seen the same level of discussion on
the affects of managing (or lack of managing) the crypto-currency's money
supply. With bitcoin the total number is finite. With etherium, it appears
that money supply management is being debated. IMHO this management of the
money supply is a huge issue.

~~~
alanfalcon
At any given time the supply of etherium is what it is, as with fiat currency.
It's still finite, even as it continues to grow. The value of etherium is a
function of the current and anticipated future supply, just as the value of
Bitcoin is a function of the expected current supply (some amount is known to
have been lost, some amount is "known" to have been lost, some amount is
expected by some parties never to be touched again, etc.)

In practical terms I don't see how this is necessarily a huge issue in the one
case and not in the other.

~~~
irln
> In practical terms I don't see how this is necessarily a huge issue in the
> one case and not in the other.

In the case of fiat currency, the supply of money is based primarily on 1)
Increases/Decreases in the loans provided by banks and to a lessor extent 2) a
central banks balance sheet.

I don't believe it's possible to add to the supply of bitcoins simply by
loaning them into existence vs. fiat currency. That is, there isn't a closed-
loop system similar to the banking system that allows for this elasticity of
bitcoin units.

I'm not advocating that this is a requirement or even desirable, it's just a
limitation that I don't see often discussed.

~~~
icebraining
_I don 't believe it's possible to add to the supply of bitcoins simply by
loaning them into existence vs. fiat currency._

Of course you can. People deposit BTC in your bank, and you then loan that out
to others while telling the depositor that they can withdraw at any time.

~~~
sjeohp
You can give out credit backed by BTC but it's impossible to give out more
actual BTC than you hold, much like gold, unlike fiat.

~~~
chii
and that credit won't be accepted by anyone who doesn't trust the creditor
(bank in this case). so it's useless unless you only intend to spend the
credit at certain locations that accept this credit

cash, on the other hand, doesn't suffer from this predicament, since it's
legally must be accepted. so Bitcoin lending via credits can't work, if at
all.

~~~
sjeohp
The entire world banking system for hundreds of years was based on credit
backed by gold, so it definitely can work.

My only point was that this wouldn't equate to more btc in circulation, just
more credit.

~~~
irln
> The entire world banking system for hundreds of years was based on credit
> backed by gold

Just adding that the system above, rightly or wrongly was not sufficient for
the expanding credit requirements of the world.

> so it definitely can work. Depends upon what your definition of work :)

> My only point was that this wouldn't equate to more btc in circulation, just
> more credit.

Exactly. And be subject to the problems with bank runs because of the
inelastic nature of gold.

------
jancsika
> Decentralized P2P systems based on cryptography were not new in 2009 (you
> probably heard of Kazaa and Bittorrent prior). What these earlier
> decentralized systems lacked was economic incentives, and the lack of baked
> in economic incentives is arguably what stifled these early P2P systems from
> persisting and thriving over time.

Both Kazaa and Bittorrent worked because of economic incentives.

For example-- if you visited what.cd before it got shut down, you would find
all these beefy seedboxes just sitting there waiting to shoot data at noobs to
improve their ratios.

If there's a distinction to be made, it's that the P2P filesharing ratios
aren't fungible.

~~~
msutherl
And now you find the same thing at [http://apollo.rip](http://apollo.rip) or
[http://redacted.ch](http://redacted.ch), almost exactly as it was.

------
danblick
The main reason I don't own any bitcoin is that I don't think the economics of
mining make sense in the long term.

Specifically: bitcoin depends on _distributed_ mining power in order to
prevent individual miners from being able to manipulate the blockchain.

However, if you accept that (1) there are economies of scale in mining, and
(2) miners are rational and will only mine when they can make a profit, then I
see no reason to believe mining power should stay "distributed" rather than
develop into a monopoly.

I realize this hasn't happened yet, but I don't think it makes sense to base a
currency on such shaky foundations.

The basic argument is also made in the paper discussed here:

[https://www.cryptocoinsnews.com/declining-profitability-
for-...](https://www.cryptocoinsnews.com/declining-profitability-for-new-
miners-threatens-bitcoin-decentralization/)

also:

[https://arxiv.org/abs/1603.05240](https://arxiv.org/abs/1603.05240)

[http://ieeexplore.ieee.org/abstract/document/7789434/](http://ieeexplore.ieee.org/abstract/document/7789434/)

~~~
ohazi
> I realize this hasn't happened yet

Don't be so sure... there are already mining pools that collectively control
far more than 50% of the network's mining capacity. This is supposed to be
existentially problematic for bitcoin, but the majority sentiment appears to
be ¯\\_(ツ)_/¯

~~~
danblick
The situation reminds me a little bit of the Keynesian beauty contest: what
matters isn't what I think of bitcoin, it's what other people think.

Do I think the average person buying bitcoin today is even aware of these
problems? Not a bit. Are they going to wise up soon? Probably not.

So maybe it makes sense to bet that Bitcoin will be popular and unaffected by
these issues for a while. (I mean, you can still use it to buy heroin, right?
Growth potential.)

On the other hand, ignoring the long-term problems feels a little like
knowingly buying into a pyramid scheme.

~~~
__Joker
Exactly, markets are based in perception. Doesn't matter what is the true
value of anything, it depends what majority thinks. To quote GOT "Power lies
where we think it lies".

------
Uptrenda
I've been searching for the perfect word that encapsulates everything we do in
the blockchain space and I guess "cryptoeconomics" is really the best fit. It
talks about crypto but it also alludes to the motivations of participants in
one word and seems to be able to be applied to both blockchain engineering and
smart contract protocols. I guess I'll be using this term in the future

~~~
ntomaino
Yes. Financial incentives are the lowest common denominator that we have as
people. Cryptocurrencies align people with this lowest common denominator.

------
bmh_ca
Wow. It's just distributed signed ledgers.

~~~
DennisP
Plus smart contracts, in Ethereum's case. As a very rough analogy:

Bitcoin is a massively replicated database with a single table having
accountid and accountBalance, with a stored procedure that lets you transfer
some of your own account's balance to any other user.

Ethereum is a massively replicated database with that same table, but you also
have developer rights. You can make your own tables and stored procedures, and
other people can use them.

(Some reasons that's just an analogy: they aren't actually SQL databases,
Bitcoin uses UTXOs instead of accounts and has limited scripting, and
Ethereum's "stored procedures" themselves have accountIds, with their own
balances.)

~~~
kochthesecond
The post insinuates that the etherium scripting language is Turing complete.
How can that be safe?

~~~
geedy
You will have to define "safe", but in general things like infinite loops are
effectively bound by the amount of gas provided. Mistakes are still expensive,
and it is easy to get the code wrong (the DAO hack and quadrigacx screw up
this week are obvious examples), but the network itself is fairly stable,
which is priority number one.

~~~
pault
Is there an analysis/post-mortem on the QuadrigaCX snafu anywhere? I would be
very interested in reading a detailed account of exactly what went wrong.

~~~
DennisP
Here's their comment:

[https://www.reddit.com/r/ethereum/comments/6ettq5/statement_...](https://www.reddit.com/r/ethereum/comments/6ettq5/statement_on_quadrigacx_ether_contract_error/)

Also, it's normal practice for a contract to throw an exception if ETH is sent
to any function that doesn't know how to deal with it. This includes the
"fallback function," which is what runs if no other function in the contract
is called. With recent versions of Solidity, this throw is built in, unless
you mark a function "payable." But they were using an older contract, and
there was no protection built into their fallback, and that's what made them
vulnerable to this issue in the first place.

------
rnernento
Lest anyone be confused this is an obnoxious and not so subtle sales pitch for
Ethereum, it isn't particularly informative.

------
nannal
>This approach has historically been thought of as insecure (the nothing at
stake problem and the long-range attack have been two of the major unsolved
vulnerabilities), but Vitalik and team have been diligently working on
solutions to these problems. Ethereum now runs on proof-of-work, but the
expectation is to switch to proof-of-stake in the next 12–18 months.

Well with all the other stuff on his plate solving a very difficult problem in
the next 12-18 months will be easy and luckily there's no actual time limit
aside from the same one he baked into etherium.

------
rrggrr
From an earlier comment yesterday:;

Etherium is a panacea for anyone hoping to reduce contractional friction, and
I believe we're at the tip of the tip of the iceberg if the tech and ether are
here to stay.

Bitcoin, on the other hand, still concerns me. If/when BTC is makes its
appearance in the every day lives of ordinary people, its anonymity value will
have eroded significantly. Traditional currencies have not yet started to
compete with BTC, but they can and they will if necessary. Try getting a
mortgage, car loan, business loan with BTC as collateral as one example of
where my concerns rest. Look at the grossly inverted price of BTC and gold
prices (artificially assuming 1BTC = 1Oz).

Before BTC there was growing dissatisfaction with money center currencies that
persists today. BTC 'took the edge off' for many in those circles and may have
relieved pressure on gold prices. I don't necessarily believe this, but I've
read in economic revisionist circles that BTC would be means for certain
central banks to redirect some demand and attention for precious metals away
from their vaults and toward an asset class they, better than anyone, are
capable of mining with their existing computing infrastructure. So, by
invention or acquiescence, BTC serves money center interests, for now, but not
indefinitely.

BTC remains a highly speculative and risky asset/network in my mind.

~~~
codesushi42
I think the killer drawback to BTC will be the implementation of its proof-of-
work consensus which present these major issues:

\- The throughput for BTC transactions is incredibly low and will not improve
significantly in the future. In theory, its block-time is 10 minutes, in
practice it can take as long as 20 minutes for a single transaction. This is
in fact by design and deters attackers-- more frequent blocks make it easier
for competing chains to get out of sync.

In comparison, Ethereum has 15 second block times, 3 minute verification. It
fixes the security risks with an implementation based on GHOST.

\- BTC mining is highly centralized and expensive. By 2020 it is estimated the
amount of electricity used globally to mine BTC will be as much as Denmark
consumes.

Ethereum already decentralizes mining by nullifying the advantages of using
ASICs. And it will fix the energy consumption issue by switching from proof-
of-work to proof-of-stake.

BTC will be seen as the first effort that introduced the blockchain to the
public. But I doubt its longevity. We have witnessed this multiple times with
tech. Consider:

\- Personal computer (Altair, Apple, later Commodore, Tandy, Atari) \-
Internet (Altavista, Yahoo) \- Social web (Myspace, Digg) \- PDAs and mobile
phones (Palm, Nokia)

In each of these scenarios, a second generation technology always came along
and ate the lunch of the one first out of the gate. Why? Robustness (more use
cases, platforms), efficiency/cost, and more user friendly.

~~~
serhei
"Why? Robustness (more use cases, platforms), efficiency/cost, and more user
friendly."

More fundamentally, the second platform benefits from the hindsight of the
first platform's experiences, having the opportunity to fix any mistakes that
happened to be hardcoded into the first platform's design.

------
daraosn
Yes, cryptocurrencies and tokens have a lot of speculation from a dollar price
perspective, and there are still non-believers and manipulators, but the
blockchain and smart contracts technology is brilliant and the idea is already
on people's mind, and it will only become stronger, despite of the price.

Social Network: For years I've seen people complaining about Facebook, others
building alternatives. If there is one way that Facebook could be defeated and
decentralized is by using a P2P blockchain social network. Take for example
Steem, not perfect but proof of concept works.

Advertisement: another example is BAT (by the JS inventor), funded in 30
seconds, it could be a real threat to Google. Just pair it with Mist browser
and ENS, and you can see the potential.

...

I think it's no longer about Bitcoin, it's about a profound decentralization
of the Internet. Some call it the Web 3.0.

~~~
dogma1138
Why do you need a block chain for a decentralized social network?

Also what actual benefits would a "decentralized" social network bring?
Facebook works because it got a lot of things right it let people communicate
and share ideas rather than being a glorified geocities where bands come to
die like MySpace and it got a critical mass of users which drove it home.

Blockchain will not decentralize the internet it might decentralize the World
Wide Web, but even then considering the power costs and the fact that
bandwidth still costs a ton of money even in developed nations why would you
want to "decentralize" a bandwidth rich service in the current landscape.

I can understand the usefulness of a blockchain for certain applications e.g.
clearing houses. But every time some one says it's like X but decentralized
and runs on the hot new blockchain I just want to head bang a wall, I could be
too old or too dumb to get my head around it but it simply looks to me that
there is a cool toy that every one wants to use as a hammer which makes them
look at everything that they want to build as a nail regardless if it makes
sense or not.

~~~
daraosn
First, it's not what I want, it's what I perceive – only my opinion.

Why a blockchain for social network? To really control my data and my online
persona. It doesn't have to be a public blockchain, can be private and shared
to my friends, if I wanted to.

I agree with you, that in poor countries the infrastructure is not prepared
yet, but the world wasn't prepared also when the Internet was on dippers, this
is just the beginning, I believe.

~~~
Terr_
> To really control my data and my online persona.

But _HOW_ does blockchain give you "control over your data" in a way that
uniquely requires a blockchain? You can do a heck of a lot just with existing
tools, like asymmetric crypto and hashing.

The only use I can think of right now is to _globally prove_ that user X
really did publish Y at some time Z in the past. In other words, preventing
anyone from "backdating" a piece of content.

Now, while that may be useful, it's not really offering you _more_ control
over your public persona. It's really just restricting what _everyone_ can do
in order to curb a certain kind of abuse.

------
zby
I really like what Buterin writes - but Cryptoeconomics is a misleading name -
it more like crypto-game-theory i.e. much narrower than the name suggests.

~~~
tinkerrr
This article isn't written by Buterin.

~~~
zby
But he coined the name.

------
quinndupont
I have a short section on cryptoeconomics in my upcoming book, which I'll post
below (still developing, and still in draft). Unlike practically every other
description of the "field", I don't take it for granted and don't uncritically
adopt it. (Feedback always welcome!)

<snip> The technological imperative of smart contacts and blockchain
technology presupposes rational contracting, which leads to particular moral
and epistemological positions. Early rationalizations of the moral and
epistemological position of cryptographically-assured smart contracts can be
found in Reagle (1996) and Szabo (1997). Since that time, several authors have
further developed the concept, leading to what is today sometimes called
“cryptoeconomics.” This emerging field deploys the technological affordances
of (public key) cryptography: specifically, the ability to authenticate and
verify parties; ensure non-repudiation of data; and in some cases, selectively
reveal identities (as with blind signatures) (Chaum, 1982). Leveraging these
cryptographic affordances, authors use the closely-related fields of rational
choice theory and game theory to construct protocols and arrangements for
creating social behaviours. In an early speech, Buterin suggests that, with
cryptoeconomics, “as soon as you have a decentralized consensus framework that
controls an internal asset and there is this valuation equilibrium where
people care about it… the cryptosystem has the capability to have real world
consequences…” (Vitalik Buterin: Cryptoeconomic Protocols In the Context of
Wider Society, 2014). For instance, Buterin considers a number of rational
choice strategies, including the prisoner’s dilemma, Nash equilibria,
hawk/dove games, markets, reputation, and an odd characterization of legal
courts. Following Nick Szabo’s earlier discussion of smart contracts, Buterin
focuses much of his discussion of cryptoeconomics on Schelling points.

Schelling points, or focal points, are a game theory concept developed by
Thomas Schelling in his book The Strategy of Conflict (1960). The strategy
allows two or more parties to reach agreement in an environment with little
information and no possibility of communication. The key insight of
Schelling’s theory is that coordination is easier when people’s attention is
drawn to prominent or focal points. Schelling offers the example of two people
in New York who need to meet in an undetermined location without having prior
communication. According to Schelling, on game theory assumptions, each party
will likely pick Grand Central Station because in a world in which many
possibilities are equally likely, humans look for patterns or unusual focal
points of reference. The assumption made by each party is that if I think
Grand Central Station is a good meeting spot, the other person may think the
same.

Similarly, in his descriptions of cryptoeconomics, Buterin offers the example
of picking matching numbers from a list without coordination or communication
(Vitalik Buterin: Cryptoeconomic Protocols In the Context of Wider Society,
2014). People will, according to the theory, look for something—anything—that
makes one number stand out—perhaps an even number, or a number with many
zeros, or a well-known lucky number. Thus, given the following numbers: 2349
65 22 100 932, both parties will likely choose “100.” In Western, decimal-
based numeracy, 100 “stands out” from the rest of the numbers, and therefore,
lacking any other way to coordinate, the rational choice is to assume a common
set of beliefs with the person you are trying to coordinate with. Of course,
these choices are culture and context specific. With numbers, other patterns
might be significant (such as “lucky” numbers), and the same goes with meeting
in New York: as times, people, and places change there might be other possible
focal points—Times Square, One World Trade Center, Brooklyn Bridge, or the New
York Public Library. In these scenarios, all available options might be “weak”
focal points. Consider the following scenario where there might be only weak
focal points: negotiations between a workers’ union and a business break down
and cannot make progress. On the theory of Schelling points, this might be due
to lack of strong focal points, in the sense of shared interests and values.
Until some stronger focal point can be found, coordination will not be
effective. On the other hand, some focal points are very “hard”—so hard that
they curtail negotiation. For example, in most of the Western world, the price
tag on a retail good is not usually an invitation to start haggling (Szabo,
1997). The stated price is a hard focal point that communicates the context
and sometimes the parameters of the contract.

While the use of Schelling points is quite powerful and can be used to
carefully navigate social contexts, it is not without issue. At its heart,
like all rational choice and game theory strategies, a rational (or
maximizing) actor is usually assumed, along with some kind of contractual
framework or rationality. Fundamentally, cryptoeconomics fails to fully
recognize that actual societies are also the result of war, exploitation,
racism, and patriarchy (Held, 1987, p. 113). Patriarchy is an especially
important value to consider for cryptoeconomics, since complete freedom and
equality—the ability to sincerely engage in contractual negotiations—is a
uniquely male capacity in most modern contexts. Rational choice or game theory
assumptions lead to a shallow view of human sociality, which is likely to
produce bad ethics and/or lead to significant errors in use and development
(as with The DAO in 2016, see Chapter 8). One alternative to this kind of
rationality, suggests Virginia Held, is to focus on “relations of concern and
caring and empathy and trust” rather than a fiction about ideal contracts
(Held, 1987, p. 125). Such a suggestion does not mean that we should dismiss
the role of contracts in society (“smart” or otherwise), rather it implies
that contracts themselves are embedded in social contexts.

