Making Sense of “Cryptoeconomics”
A few months ago Parker Thompson, a well known Silicon Valley VC, tweeted that “the concept of crypto-economics is stupid. It’s economics. Inventing your own word is just an excuse to ignore well-understood concepts.”
几个月前， 一个硅谷非常有名的VC——帕克·汤普森 发推特说 “加密经济的概念很愚蠢。拜托，这可是经济学，任何把自己发明的词加在经济学前面都是故弄玄虚。”
The term “cryptoeconomics” causes a lot of confusion. People are often unclear on what it is supposed to mean. The word itself can be misleading, as it suggests that there is a parallel “crypto” version of the whole of economics. This is wrong, and Parker is right to mock such a generalization.
In simple terms, cryptoeconomics is the use of incentives and cryptography to design new kinds of systems, applications, and networks. Cryptoeconomics is specifically about building things, and has most in common with mechanism design — an area of mathematics and economic theory.
Cryptoeconomics is not a subfield of economics, but rather an area of applied cryptography that takes economic incentives and economic theory into account. Bitcoin, ethereum, zcash and all other public blockchains are products of cryptoeconomics.
Cryptoeconomics is what makes blockchains interesting, what makes them different from other technologies. As a result of Satoshi’s white paper，we have learned that through the clever combination of cryptography, networking theory, computer science and economic incentives we can buildnew kinds of technologies. These new cryptoeconomic systems can accomplish things that these disciplines could not achieve on their own. Blockchains are just one product of this new practical science.
This article aims to explain cryptoeconomics in clear, simple terms. First, we examine bitcoin as an example of cryptoeconomic design. Second, we consider how cryptoeconomics relates to economic theory in general. Third, we look at three different areas of cryptoeconomic design and research that are active today.
本文旨在以清晰、简单的概念解释加密经济。 首先，我们从比特币切入，研究加密经济的设计。 第二，我们探究加密经济学如何与经济理论相关联。 第三，我们看看如今比较活跃的三个不同方向的加密经济设计和研究。
1. What is cryptoeconomics? Bitcoin as a case study 什么是加密经济？ 以比特币为例
Bitcoin is a product of cryptoeconomics.
Bitcoin’s innovation is that it allows many entities who do not know one another to reliably reach consensus about the state of the bitcoin blockchain.This is achieved using a combination of economic incentives and basic cryptographic tools.
Bitcoin’s design relies on economic incentives and penalties. Economic rewards are used to enlist miners to support the network. Miners contribute their hardware and electricity because if they produce new blocks, they are rewarded with amounts of bitcoin.
Second, economic costs or penalties are part of bitcoin’s security model. The most obvious way to attack the bitcoin blockchain would be to gain control of a majority of the network’s hashing power — a so-called 51 percent attack — which would let an attacker reliably censor transactions and even change the past state of the blockchain.
其次，经济成本或经济处罚是比特币安全模型的一部分。攻击比特币区块链最典型的方法是控制大部分网络的哈希算力— 即所谓的51％攻击 — 这允许攻击者稳稳地审查交易(比如拒绝处理某个用户的所有交易)，甚至改变链上过去的所有状态。
But gaining control of hashing power costs money, in the form of hardware and electricity. Bitcoin’s protocol intentionally makes mining difficult, meaning that gaining control of a majority of the network is extremely expensive — enough that it would be hard to profit from the attack. As of November 16, 2017, the cost of a 51 percent attack on bitcoin would be around $3.14 billion in hardware and $5.6 million in electricity every day.
A Bitmain mining facility in Inner Mongolia (Photo: Stefan Chow)
内蒙古的比特大陆矿场 (Photo: Stefan Chow)
Without these carefully calibrated economic incentives, bitcoin wouldn’t work. If mining did not come with a high cost, it would be easy to launch a 51 percent attack. If there were no mining reward, there would be no industry of people who buy hardware and pay for electricity to contribute to the network.
Bitcoin also relies on cryptographic protocols. Public-private key cryptography is used to give individuals safe, exclusive control of their bitcoin. Hash functions are used to “link” each block in the bitcoin blockchain, proving an order of events and the integrity of past data.
Cryptographic protocols like these give us the basic tools necessary to build reliable, secure systems like Bitcoin. Without something like public-private key infrastructure, we could not guarantee to a user that they have exclusive control over their bitcoin. Without something like hashing functions, nodes would not be able to guarantee the integrity of the history of bitcoin transactions contained in Bitcoin’s blockchain.
Without the hardness of cryptographic protocols like hashing functions or public-private key cryptography, we would have no secure unit of account with which to reward miners — no confidence that our record of past accounts was authentic and exclusively controlled by a rightful owner. Without a carefully calibrated set of incentives to reward an industry of miners, that unit of account could have no market value because there would be no confidence that the system could persist into the future.
In this way, bitcoin’s design requires an understanding of both cryptography and how incentives affect the security properties and functionality of systems built with cryptography. Cryptoeconomics is strange and counterintuitive. Most of us are not used to thinking of money as a design or engineering problem, nor are we used to economic incentive design being an essential component of a new technology. Cryptoeconomics requires us to think about information security problems in economic terms.
One of the most common mistakes in this industry is made by those who view blockchains only through a lens of computer science or applied cryptography.We have a strong tendency to prioritize the things we are most comfortable with, and see things outside of our domain of expertise as less important.
In blockchain technology, this leads many people to assume or abstract away the crucial role of economic incentives. This is one reason we see meaningless phrases like “blockchains are trustless”, “bitcoin is backed only by math” or “blockchains are immutable.” These are all wrong in their own way, but all have the effect of obfuscating the essential role of a large network of people whose necessary participation in the network is maintained through economic incentives.
Cryptoeconomic systems like bitcoin feel like magic to someone who views them only as a product of computer science, because bitcoin can do things that computer-science alone could never accomplish. Cryptoeconomics isn’t magic — it’s just interdisciplinary.
2. How does it relate to economics more generally?加密经济学如何与经济理论相关联？
The term cryptoeconomics can be misleading because it suggests a comparison to economics as a whole. This is part of what leads people like Parker to dismiss the term. Economics is the study of choice: how people and groups of people respond to incentives. The invention of cryptocurrency and blockchain technology does not require a new theory of human choice — the humans haven’t changed. Cryptoeconomics is not the application of macroeconomic and microeconomic theory to cryptocurrency or token markets.
Cryptoeconomics has most in common with mechanism design, a field related to game theory. In game theory, we look at a given strategic interaction (a “game”) and then try to understand the best strategies for each player, and the likely outcome if both players follow those strategies. For instance, we might use game theory to look at a negotiation between two firms, relations between countries or even evolutionary biology.
Mechanism design is often referred to as reverse game theory because we start with a desired outcome and then work backwards to design a game that, if players pursue their own self interest, will produce the outcome we want. For instance, imagine we are responsible for designing the rules of an auction. We have an objective that we want bidders to actually bid the real value they place on an item. To achieve this, we apply economic theory to design the auction as a game where the dominant strategy for any player is to always bid their true value. One solution to this problem is called a Vickrey auction, where bids are secret and the winner of the auction (defined as the player with the highest bid) only pays the second highest amount that was bid.
Cryptoeconomics, like mechanism design, focuses on designing and creating systems. Like in our auction example, we use economic theory to design “rules” or mechanisms that produce a certain equilibrium outcome. But in cryptoeconomics, the mechanisms used to create economic incentives are built using cryptography and software and the systems we are designing are almost always distributed or decentralized.
与机制设计一样，加密经济专注于设计和创建系统。与我们的拍卖示例一样，我们使用经济理论来设计产生某种均衡结果的“规则”或机制。 但在加密经济中，用于创建经济激励的机制是用密码学和软件构建的而且我们设计的系统几乎都是分布式或去中心化的 。
Bitcoin is a product of this approach. Satoshi wanted bitcoin to have certain properties — for instance, that it be able to reach consensus about its internal state and that it be censorship-resistant. Then, Satoshi set out to design a system that would achieve those properties, assuming people responded in rational ways to economic incentives.
Most often, cryptoeconomics is used to provide a security guaranteeabout a distributed system. For instance, we have a cryptoeconomic security guarantee that the bitcoin blockchain is secure against a 51 percent attack unless someone is willing to spend a few billion dollars. Or, in a state channel — a topic we discuss later — we can have a cryptoeconomic security guarantee that an off-chain process is nearly as secure and final as an on-chain transaction.
It is worth noting that mechanism design is not a panacea. There is a limit to how much we can rely on incentives to predictably shape future behaviour. As Nick Szabo rightly points out, ultimately we are speculating about people’s future mental states and making assumptions about how they react to certain incentives. A cryptoeconomic system’s security guarantee depends in part on the strength of its assumptions about how people react to economic incentives.