Cryptoeconomics
Cryptoeconomics offers a way to coordinate the behavior of network members to solve the problems of coordinating members in a digital ecosystem using cryptography and economic leverage.
Cryptoeconomics is not a subset of traditional economics but a blend of game theory, the field of mechanism design, mathematics, and methods of economics. The main goal is to understand how to fund, design, develop, and facilitate the operation of decentralized networks defi-decentralized-finance.
The cryptoeconomic circle
The cryptoeconomics circle is an overarching model of cryptoeconomics. It was published by Joel Monegro and illustrates abstract value flows through different membership classes in a peer-to-peer economy. Utility: Reference from AXS
It represents a 3-sided market:
- Among miners (supply side)
- Users (demand side)
- Investors (funding side)
Those teams exchange the value with each other using a cryptocurrency resource token
Investors have two roles in this model: providing liquidity to miners to sell their tokens, and taking advantage of the network by backing tokens that cost more than mining costs.
The model represents these two roles by dividing investors into two groups: traders (short-term investors) and owners (hodlers) (long-term investors).
Funding
When investing, we will think about funding team and funding network. The funding team provides the financial capital to build the service. Funding networks support growth by raising capital from the whole community. They are very different forms of investment, but both are essential to long-term network success.
What problems can be solved?
Before Bitcoin, it was considered impossible to create a peer-to-peer network, in which the consensus can be achieved without holes or errors.
This problem is often referred to as the Byzantine General Problem. It is a logical dilemma, showing that in distributed systems it is very important for actors to reach agreement. The assumption of this problem is that, because some actors may be unreliable, agreement can never be reached and the network cannot function as intended.
With the creation of Bitcoin, Satoshi Nakamoto brought economic leverage into the peer-to-peer network and solved this problem.
