Cryptocurrency and Blockchain technologies
THE FUTURE IS HERE
Cryptoeconomics
Since a blockchain protocol is a well thought out system of relationships between different participants, a new economics field called cryptoeconomics was established for this purpose. Cryptoeconomics is a combination of cryptography, economics and game theory, that tries to establish a decentralized network of individuals which is robust and develops through time by including new participants, despite the potential attempts of individuals to abuse the system. Individuals can be included in various roles in the system, and the protocol is set in such a manner that these individuals are rewarded or punished according to their completion of tasks. This means that there is a symmetry or a so called “incentive discentive model” — beside receiving a reward for a successfully completed role, an individual can also be punished by having its staked cryptocurrency “burned”. Whenever possible, the protocol evaluates an individual’s contribution independently and rewards or punishes them accordingly; when the protocol does not have this ability, this decision is left to the market.
Technical Analysis
Now let us take a look at where value drivers of digital currencies with utility value are hiding. These currencies have a utility value only inside the protocol that clearly defines the rules of the game and the relationships between the protocol users. Such currency has utility value, which means in practice that it can be spent for a service or earned by performing a task within the system. These digital currencies could therefore be called “service money”. What are these types of currencies, that have become the most popular in so called ICOs (initial coin offerings) really about? It’s basically the issue of tokens or units of value, in which value is created “out of thin air” and is essentially based on the expectations of investors or users, that the team will successfully build a protocol that operates according to the conceived principle (exchange of tokens for the service) and attract users. The issued tokens are a type of fuel that runs the protocol or the platform and the first investors at the same time become the first users of the platform on the side of demand for a certain service.
Smart Contracts
In the first phase of crowd-funding, individuals contribute the capital at the beginning of protocol or platform building, do they own the platform? Is the token, when first issued, nothing more than a share, representing ownership of a certain asset and future yield related to it? But this is not the case. A built protocol cannot be owned by anyone, similarly to the TCP/IP protocol, used for communication between electronic devices, or the HTTP method for transfer of information via the World Wide Web. The blockchain protocol is run by a number of computers around the world and they are rewarded for their contribution of computer operations in a cyptocurrency. The protocol thus “operates on its own”, according to the rules that were set in advance, if only it is designed well enough, that it is used for a certain activity, which creates value and attracts miners. The protocol ownership in this case becomes irrelevant — it is owned by everyone and at the same time by no one. The yield per token (let us say in the form of a dividend) is no longer a variable in this business model, as the protocol does not work on the principle of profit and its distribution to investors.
LouieCrypto - Cryptocurrency 101 