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Crypto Economics vs Tokenomics

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Tokenomics is a subset of crypto economics

Are crypto economics and tokenomics the same thing? No. Tokenomics is a subset of crypto economics.

Crypto economics is about 3 things:

  • Messages in the past (through cryptography)

  • Economic incentives to be used in the present (through game theory and mechanism design)

  • Desired system properties in the future (through token design)

Tokenomics (or token economics) is a subset of crypto economics. It is basically economics of the token; aka the crypto project. It does not include the crypto-system (aka blockchain technology like ETH, NEO, NEM).

  • Economic incentives to be used in the present (through game theory and mechanism design)

  • Desired system properties in the future (through token design)

Messages in the Past

Why past messages are important?

In short, blockchain technology (aka crypto system) is like a group WhatsApp. It keeps messages in the past and everyone in the group can see it. In blockchain, the messages hold transactions: Amy gives £10 to Berry. Claudia gives £8 to Daniel. If there is a dispute, you can always go back to the transaction history and confirm it.

Now, what if someone edits the messages? That’s a big no-no. So instead, the messages are encrypted through cryptography. Now, no one can edit the messages in the WhatsApp chat.

Terms to explore: cryptography, Byzantine’s general problem

Economic Incentives in the Present

There are various economic incentives.

Imagine that there are 3 bridges for you to take.

  • Bridge 1: you have to pay £1 when you use it.

  • Bridge 2: the bridge is made 1000 years ago, a hole in the middle and crocodiles below, eating you if you fall. No one use this bridge in the past 950 years.

  • Bridge 3: a wooden bridge with termites all over, a family of woodpecker pecking on the wood and a very hungry lion is on the other end, waiting to eat anything that moves. The last person who used it was eaten by the lion. You can see his skeletons at the end of the bridge.

Which bridge will you choose? You choose bridge 1, of course. It’s safe, and easy to use. That is an important criteria in the design of the crypto-project.

Terms to explore: game theory, incentives, asymmetric information

Desired system properties in the Future

Alright, so let’s say everything is good so far. How can we make sure that in 10 years, we will still be using Bridge 1?

Imagine you own Bridge 1. If people want to cross the bridge, they have to pay you £1. Will you continue to stay in the bridge business and continue providing the bridge service to people? Well of course, because you are going to be earning money every time people pass.

It is the similar in blockchain. If validate a transaction, you get paid in transaction fee. Now, you are incentivised to be part of the network (aka maintain that bridge, clean it, make sure people use it so you can make money) and earn that transaction fee.