What is Cryptoeconomics?
Blockchains only exist as a result of cryptoeconomics, without which they will merely be a peer-to-peer network.
As you read further, you will get to understand what cryptoeconomics is all about and how it sets blockchains apart from other decentralized peer-to-peer networks.
Peer-to-peer networks are the base upon which decentralized systems can exist. Excellent for transfers among individuals without a central system. But for one looking to take steps to invest in cryptocurrency, or be willing to input money, something more than just a mere arrangement for direct transfer is required.
In October 2008, Satoshi Nakamoto released a paper for the launch of Bitcoin, birthing a decentralized peer-to-peer network that we call blockchains today.
• Blockchain technology runs on the principles of cryptoeconomics, setting it apart from other decentralized peer-to-peer networks.
• Cryptoeconomics employs game theory to keep the power of miners in check and ensure adherence to the rules.
• Before Bitcoin, achieving consensus on a peer-to-peer network was impossible as they were constantly prone to human faults and attacks.
• With the creation of Bitcoin, Satoshi Nakamoto introduced economic incentives to a peer-to-peer network and solved the problem of human consensus.
SEE ALSO: What is a Blockchain Trilemma?
SEE ALSO: What Is Crypto Forging?
SEE ALSO: What is a Crypto Shielded Transaction?
Cryptoeconomics refers to the application of cryptography, computer networks, and game theory to operate and maintain a well-secured and decentralized system. It has to do with practices that govern the production, distribution, and consumption of value in a decentralized digital economy.
Derived from two words: Cryptography and Economics, cryptoeconomics covers the combination of both terms in effectively operating a Decentralised peer-to-peer network which we know as the blockchain.
Without cryptoeconomics, blockchains will be just like other peer-to-peer networks that existed before Bitcoin was launched.
The Objectives of Cryptography in Cryptoeconomics
Cryptography relates to secured communication strictly between two parties, the sender and the receiver, without any other party getting to know or receive the message.
Blockchains are based on peer-to-peer systems to be decentralized.
Strict exchange of currency and assets between two parties without a third party or central authority getting involved in the exchange is achieved by employing cryptography. In other words Hashing, Signatures, Proof of work/proof of stake which is an improved form of proof of work, are employed to keep a record of all transactions in blocks.
Cryptography is also utilized in mining, a way of authenticating blocks and creating an immutable chain of blocks that makes blockchains what we know them to be.
In traditional finance or centralized systems, there is the existence of a central authority that coordinates, monitors, and makes decisions to make the system function the way it was meant to function and link two parties together.
Without a central authority to oversee and regulate the activities of a decentralized system, it opens up the obvious fact that participants on the network rely on one another to keep the peer-to-peer system secure and working. So they all have to come to a consensus to authenticate the network.
Validation of blocks on a blockchain is how the transfer of value is verified. This is carried out by miners.
Economics I applied as a way of keeping the system going by introducing rewards to miners for each block validated. With the game theory in play, which is simply following the option with the best benefits, miners are likely to follow the rules of the system to reap rewards.
This outlives other peer-to-peer networks like torrents which offered no rewards to participants, hence they could not be relied upon to follow the rules.
The supply of tokens on a blockchain is regulated by regulating the time interval per addition of blocks, the maximum number of blocks, and also a way of punishing defaulters through loss of value or a penalty.
Cryptoeconomics offer rewards to miners for performing tasks according to set rules.
Nowadays, proof of stake is employed by most blockchains and you can earn as a miner simply by picking the best staking coins and staking your cryptocurrencies.
Many top cryptocurrencies use the Proof of stake consensus mechanism. The proof-of-stake model allows owners of a cryptocurrency to verify blocks by staking their coins as collateral.
When there is a need for a block to be validated, a coin owner will be chosen randomly, after which they receive profit on their staked coins.
Cryptoeconomics acts as the central authority of a decentralized system by ensuring its security and continuity.
Blockchain technology is not exactly perfect as the concept of cryptoeconomics upon which it breathes is still relatively new.
This simple way of using cryptography with backings of economics to regulate how participants in a peer-to-peer network behave is still undergoing improvements and getting better.
You too can be part of the improvements by staking. Cardano is popular crypto for staking. Make a pick from some of the best Cardano staking pools to earn high yields.
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