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The word cryptoeconomics has been in the vogue lately. The term is somewhat disingenuous- it seems to suggest that there is a whole another “crypto” version of economics, like ‘microeconomics’ or ‘macroeconomics’. And this couldn’t be more far from what the term actually means.

What is Cryptoeconomics?

To put it simply, cryptoeconomics just refers to the use of incentives and cryptography to design different types of systems, networks and applications. It is about building things, and it certainly isn’t a subfield of economics. It is simply an area of applied cryptography that actually takes economics theory and incentives into account. All the popular blockchains that we hear about today, Bitcoin, Ethereum, Zcash; they are all a product of cryptoeconomics.

Cryptography, computer science, networking theory, and economics can together build new technologies. That is what cryptoeconomics is all about. Blockchain is simply an end product of the cryptoeconomic process.

Why is Cryptoeconomics so important?

Just like the forces of economics, like demand and supply, help unknown parties to come together and reach an understanding regarding a product to be produced, cryptoeconomics allows similarly unknown parties to reach consensus about the state of a blockchain. Without the principles of cryptoeconomics, various decentralized networks would not exist. Bitcoin and Ethereum would simply now work. The principles allow various foreign individuals around the globe to reach consensus without the presence of any centralized authority.

What are the major challenges for cryptoeconomics?

The source of almost all the problems cryptoeconomics faces is the very thing that is the most appealing feature of crypto- the absence of a trusted central authority. Building a proper incentive structure without such a body is a tough task, because the rules may be sound on paper, but human behaviour is unpredictable, which means the actual real world outcomes may turn out to be entirely different as to what was intended.

Cryptoeconomics is akin to building a new economic structure, from scratch. And we are not used to it, we are not capable of predicting human behaviour with a high rate of accuracy.

What role do tokens play?

A well-designed token system can alleviate the above problems. A token is a tool, much like money is, to manage the crypto micro-economy. And when used correctly, tokens can effectively manage the incentives and help with as-intended functioning of the cryptoeconomic structure. Failure in achieving this will result in failure of the whole system.