13 ms·

Cryptoeconomics 101

264 points by ntomaino 9y ago

bmh_ca 9y ago
Wow. It's just distributed signed ledgers.
- andirk 9y ago
  I think the security an inability to double spend is pretty important too. The ledger is the proof but not the means.
  - bmh_ca 9y ago
    Isn't a double (n+1) ledger the definition of the inability to double spend (presuming Atomicity or reconcilability)? That's a genuine question.
    - bhaak 9y ago
      It's distributed. You can't presume atomicity. The consensus rules ensures that everybody (eventually) stays on the same chain and the PoW mechanism ensures that (after a few confirmations) it would be too costly to change the blockchain for a double spend.
- DennisP 9y ago
  Plus smart contracts, in Ethereum's case. As a very rough analogy: Bitcoin is a massively replicated database with a single table having accountid and accountBalance, with a stored procedure that lets you transfer some of your own account's balance to any other user. Ethereum is a massively replicated database with that same table, but you also have developer rights. You can make your own tables and stored procedures, and other people can use them. (Some reasons that's just an analogy: they aren't actually SQL databases, Bitcoin uses UTXOs instead of accounts and has limited scripting, and Ethereum's "stored procedures" themselves have accountIds, with their own balances.)
  - kochthesecond 9y ago
    The post insinuates that the etherium scripting language is Turing complete. How can that be safe?
    - geedy 9y ago
      You will have to define "safe", but in general things like infinite loops are effectively bound by the amount of gas provided. Mistakes are still expensive, and it is easy to get the code wrong (the DAO hack and quadrigacx screw up this week are obvious examples), but the network itself is fairly stable, which is priority number one.
      - pault 9y ago
        Is there an analysis/post-mortem on the QuadrigaCX snafu anywhere? I would be very interested in reading a detailed account of exactly what went wrong.
        DennisP 9y ago
        Here's their comment: https://www.reddit.com/r/ethereum/comments/6ettq5/statement_on_quadrigacx_ether_contract_error/ https://www.reddit.com/r/ethereum/comments/6ettq5/statement_... Also, it's normal practice for a contract to throw an exception if ETH is sent to any function that doesn't know how to deal with it. This includes the "fallback function," which is what runs if no other function in the contract is called. With recent versions of Solidity, this throw is built in, unless you mark a function "payable." But they were using an older contract, and there was no protection built into their fallback, and that's what made them vulnerable to this issue in the first place.
    - DennisP 9y ago
      Indeed it is, aside from the fact that you pay a transaction fee for every step so at some point you run out of money. Some other things that run on Turing-complete code: passenger jets, medical equipment, self-driving cars, and nuclear reactors. I write and audit Ethereum scripts for a living. It takes a lot of care, but it's manageable because the scripts are typically under a thousand lines total, implementing simple business rules rather than complicated algorithms. It's feasible to make it very solid if you take your time, make the code as simple and clear as possible, write lots of unit tests, hire expert review, publish the code and maybe post a bounty. It's also good practice to build in something to handle emergencies, just in case. People are working on formal verification for Ethereum contracts, so down the road we should be able to actually prove their properties.
- fragsworth 9y ago
  If it were that simple, we'd have had online currencies a long time ago.
- msutherl 9y ago
  re: most other software: "Wow. It's just a relational database."
deleted 9y ago
[deleted]
rrggrr 9y ago
From an earlier comment yesterday:; Etherium is a panacea for anyone hoping to reduce contractional friction, and I believe we're at the tip of the tip of the iceberg if the tech and ether are here to stay. Bitcoin, on the other hand, still concerns me. If/when BTC is makes its appearance in the every day lives of ordinary people, its anonymity value will have eroded significantly. Traditional currencies have not yet started to compete with BTC, but they can and they will if necessary. Try getting a mortgage, car loan, business loan with BTC as collateral as one example of where my concerns rest. Look at the grossly inverted price of BTC and gold prices (artificially assuming 1BTC = 1Oz). Before BTC there was growing dissatisfaction with money center currencies that persists today. BTC 'took the edge off' for many in those circles and may have relieved pressure on gold prices. I don't necessarily believe this, but I've read in economic revisionist circles that BTC would be means for certain central banks to redirect some demand and attention for precious metals away from their vaults and toward an asset class they, better than anyone, are capable of mining with their existing computing infrastructure. So, by invention or acquiescence, BTC serves money center interests, for now, but not indefinitely. BTC remains a highly speculative and risky asset/network in my mind.
- codesushi42 9y ago
  I think the killer drawback to BTC will be the implementation of its proof-of-work consensus which present these major issues: - The throughput for BTC transactions is incredibly low and will not improve significantly in the future. In theory, its block-time is 10 minutes, in practice it can take as long as 20 minutes for a single transaction. This is in fact by design and deters attackers-- more frequent blocks make it easier for competing chains to get out of sync. In comparison, Ethereum has 15 second block times, 3 minute verification. It fixes the security risks with an implementation based on GHOST. - BTC mining is highly centralized and expensive. By 2020 it is estimated the amount of electricity used globally to mine BTC will be as much as Denmark consumes. Ethereum already decentralizes mining by nullifying the advantages of using ASICs. And it will fix the energy consumption issue by switching from proof-of-work to proof-of-stake. BTC will be seen as the first effort that introduced the blockchain to the public. But I doubt its longevity. We have witnessed this multiple times with tech. Consider: - Personal computer (Altair, Apple, later Commodore, Tandy, Atari) - Internet (Altavista, Yahoo) - Social web (Myspace, Digg) - PDAs and mobile phones (Palm, Nokia) In each of these scenarios, a second generation technology always came along and ate the lunch of the one first out of the gate. Why? Robustness (more use cases, platforms), efficiency/cost, and more user friendly.
daraosn 9y ago
Yes, cryptocurrencies and tokens have a lot of speculation from a dollar price perspective, and there are still non-believers and manipulators, but the blockchain and smart contracts technology is brilliant and the idea is already on people's mind, and it will only become stronger, despite of the price. Social Network: For years I've seen people complaining about Facebook, others building alternatives. If there is one way that Facebook could be defeated and decentralized is by using a P2P blockchain social network. Take for example Steem, not perfect but proof of concept works. Advertisement: another example is BAT (by the JS inventor), funded in 30 seconds, it could be a real threat to Google. Just pair it with Mist browser and ENS, and you can see the potential. ... I think it's no longer about Bitcoin, it's about a profound decentralization of the Internet. Some call it the Web 3.0.
- darawk 9y ago
  While I think we ought to be skeptical of "tons of money poured in, therefore it's a good idea" sort of arguments, I agree that there is definitely value here. Cryptocurrencies promise to nativize scarcity on the web. The absence if which has led to some amazing things, but has also caused some troubles. Ideally, we'll now be able to capture the best of both worlds. A free and open internet, but with opt-in monetary incentives and scarcity.
  - serhei 9y ago
    There's definitely value in cryptocurrencies, in the sense of significant promise of being useful for new types of financial instruments and transactions. This does not preclude the possibility of there being a crypto bubble, i.e. demand/excitement causing the price of the currency to rise far far above its current level of usefulness. The ultimate usefulness of cryptocurrencies is determined by things that may take years or decades to figure out a way to do: everything from 'is it a good store of value' to 'can I shop with it on Amazon?' to 'can I use it to issue equity for my startup?' This gradual growth in usefulness does not really match the tendency of coins to double in price in very short periods of time, so the question is whether the temporary bubbles and disappointments are severe enough to disrupt the gradual growth in base value. This is no different from real estate bubbles potentially making things painful for people who just want to buy a house to live in it.
Uptrenda 9y ago
I've been searching for the perfect word that encapsulates everything we do in the blockchain space and I guess "cryptoeconomics" is really the best fit. It talks about crypto but it also alludes to the motivations of participants in one word and seems to be able to be applied to both blockchain engineering and smart contract protocols. I guess I'll be using this term in the future
- ntomaino 9y ago
  Yes. Financial incentives are the lowest common denominator that we have as people. Cryptocurrencies align people with this lowest common denominator.
irln 9y ago
An understanding of how to authenticate the blockchain and transactions is obviously essential, however, I haven't seen the same level of discussion on the affects of managing (or lack of managing) the crypto-currency's money supply. With bitcoin the total number is finite. With etherium, it appears that money supply management is being debated. IMHO this management of the money supply is a huge issue.
- alanfalcon 9y ago
  At any given time the supply of etherium is what it is, as with fiat currency. It's still finite, even as it continues to grow. The value of etherium is a function of the current and anticipated future supply, just as the value of Bitcoin is a function of the expected current supply (some amount is known to have been lost, some amount is "known" to have been lost, some amount is expected by some parties never to be touched again, etc.) In practical terms I don't see how this is necessarily a huge issue in the one case and not in the other.
  - irln 9y ago
    > In practical terms I don't see how this is necessarily a huge issue in the one case and not in the other. In the case of fiat currency, the supply of money is based primarily on 1) Increases/Decreases in the loans provided by banks and to a lessor extent 2) a central banks balance sheet. I don't believe it's possible to add to the supply of bitcoins simply by loaning them into existence vs. fiat currency. That is, there isn't a closed-loop system similar to the banking system that allows for this elasticity of bitcoin units. I'm not advocating that this is a requirement or even desirable, it's just a limitation that I don't see often discussed.
    - icebraining 9y ago
      I don't believe it's possible to add to the supply of bitcoins simply by loaning them into existence vs. fiat currency. Of course you can. People deposit BTC in your bank, and you then loan that out to others while telling the depositor that they can withdraw at any time.
jancsika 9y ago
> Decentralized P2P systems based on cryptography were not new in 2009 (you probably heard of Kazaa and Bittorrent prior). What these earlier decentralized systems lacked was economic incentives, and the lack of baked in economic incentives is arguably what stifled these early P2P systems from persisting and thriving over time. Both Kazaa and Bittorrent worked because of economic incentives. For example-- if you visited what.cd before it got shut down, you would find all these beefy seedboxes just sitting there waiting to shoot data at noobs to improve their ratios. If there's a distinction to be made, it's that the P2P filesharing ratios aren't fungible.
- msutherl 9y ago
  And now you find the same thing at http://apollo.rip http://apollo.rip or http://redacted.ch http://redacted.ch, almost exactly as it was.
kneel 9y ago
This submission is an ethereum pump article. It has never made sense to have turing complete currencies. Ethereum will continue to be a great idea in the short term and a terrible idea in the long term.
- a_imho 9y ago
  The article lacks any details what should one buy cryptocurrencies (btc and eth) for, besides gambling on them of course.
- johnnydoebk 9y ago
  I agree. No offence but this is an /r/ethereum quality content.
- Fej 9y ago
  Yeah, I got that vibe around > I believe in 50 years, cryptoeconomics may be a discipline as widely studied as physics and Satoshi may be as widely revered as Galileo. Holy cow. I stopped reading at that point. Did the author read that over before publishing?
  - jacobush 9y ago
    I can easily imagine a dystopian future where basic sciences are no longer taught and Galileo seems irrelevant and quaint compared to the everyday chores one must do to avoid being repurposed as stock for the local Soylent Green factory.
  - shusson 9y ago
    I stopped reading at that point as well.
- HXFIVE 9y ago
  Yeah, I was expecting something insightful, but it's just an Ethereum promo. Nothing against Ethereum (although I'm personally not very excited about/interested in it).
- andrewla 9y ago
danblick 9y ago
The main reason I don't own any bitcoin is that I don't think the economics of mining make sense in the long term. Specifically: bitcoin depends on distributed mining power in order to prevent individual miners from being able to manipulate the blockchain. However, if you accept that (1) there are economies of scale in mining, and (2) miners are rational and will only mine when they can make a profit, then I see no reason to believe mining power should stay "distributed" rather than develop into a monopoly. I realize this hasn't happened yet, but I don't think it makes sense to base a currency on such shaky foundations. The basic argument is also made in the paper discussed here: https://www.cryptocoinsnews.com/declining-profitability-for-new-miners-threatens-bitcoin-decentralization/ https://www.cryptocoinsnews.com/declining-profitability-for-... also: https://arxiv.org/abs/1603.05240 https://arxiv.org/abs/1603.05240 http://ieeexplore.ieee.org/abstract/document/7789434/ http://ieeexplore.ieee.org/abstract/document/7789434/
- ohazi 9y ago
  > I realize this hasn't happened yet Don't be so sure... there are already mining pools that collectively control far more than 50% of the network's mining capacity. This is supposed to be existentially problematic for bitcoin, but the majority sentiment appears to be ¯\_(ツ)_/¯
  - danblick 9y ago
    The situation reminds me a little bit of the Keynesian beauty contest: what matters isn't what I think of bitcoin, it's what other people think. Do I think the average person buying bitcoin today is even aware of these problems? Not a bit. Are they going to wise up soon? Probably not. So maybe it makes sense to bet that Bitcoin will be popular and unaffected by these issues for a while. (I mean, you can still use it to buy heroin, right? Growth potential.) On the other hand, ignoring the long-term problems feels a little like knowingly buying into a pyramid scheme.
    - __Joker 9y ago
      Exactly, markets are based in perception. Doesn't matter what is the true value of anything, it depends what majority thinks. To quote GOT "Power lies where we think it lies".
trunnell 9y ago
It'd be cool to have digital cash, but I think we're decades away. Unfortunately, it seems that cryptocurrency enthusiasts focus more on the crypto than on the currency. To be taken seriously, there need to be realistic approaches to things like monetary policy. The ungoverned money supply of cryptocurrencies seems to be touted as a feature, but AFAICT, it's a fatal bug. Think of the money supply as the denominator and total addressable value as the numerator; the goal with a stable currency is to keep the ratio constant over time (or as close as possible). The fixed money supply of bitcoin is a joke. If the currency were successful, bitcoin's fixed supply (a constant denominator) wouldn't keep up with global growth (a growing numerator), which would make the currency more valuable over time. This would result in a deflationary spiral (no one spends the money b/c they're better off waiting and letting it appreciate, which leads to less spending, which leads to even more deflation, etc.) The etherium money supply is said to be TBD, but why would anyone be optimistic? Consider the layers of analysis underpinning the last Fed statement in May: https://www.federalreserve.gov/monetarypolicy/files/monetary20170503a1.pdf https://www.federalreserve.gov/monetarypolicy/files/monetary... A) political philosophy (for the Fed, the goal is to maximize employment and stabilize prices), B) macroeconomic understanding (for example, the relationship between money supply and growth), C) economic data collection (employment, prices, inventory, output, etc.) That's incomplete, but consider: how much of that kind of thing is even approached by any cryptocurrency community? Does anyone think the same kind of extreme care taken by the Fed is going to be replicated? When know-nothing articles like this one pass for news, well... let's just say the emperor's naked.
- icebraining 9y ago
  We already have electronic money - I can pay using electronic euros just fine. The point of creating Bitcoin was to make something different, a digital currency that couldn't be managed. What would be the point of creating a copy of existing currencies? I'm completely ignorant about the future of Bitcoin, but the reason I like it is because it's an experiment. If nothing else, at least it might serve as evidence for mainstream theories if and when it fails. In any case, it's not strictly true that Bitcoin's supply is fixed, you can have fractional-reserve banking.
  - 9y ago
quinndupont 9y ago
I have a short section on cryptoeconomics in my upcoming book, which I'll post below (still developing, and still in draft). Unlike practically every other description of the "field", I don't take it for granted and don't uncritically adopt it. (Feedback always welcome!) <snip> The technological imperative of smart contacts and blockchain technology presupposes rational contracting, which leads to particular moral and epistemological positions. Early rationalizations of the moral and epistemological position of cryptographically-assured smart contracts can be found in Reagle (1996) and Szabo (1997). Since that time, several authors have further developed the concept, leading to what is today sometimes called “cryptoeconomics.” This emerging field deploys the technological affordances of (public key) cryptography: specifically, the ability to authenticate and verify parties; ensure non-repudiation of data; and in some cases, selectively reveal identities (as with blind signatures) (Chaum, 1982). Leveraging these cryptographic affordances, authors use the closely-related fields of rational choice theory and game theory to construct protocols and arrangements for creating social behaviours. In an early speech, Buterin suggests that, with cryptoeconomics, “as soon as you have a decentralized consensus framework that controls an internal asset and there is this valuation equilibrium where people care about it… the cryptosystem has the capability to have real world consequences…” (Vitalik Buterin: Cryptoeconomic Protocols In the Context of Wider Society, 2014). For instance, Buterin considers a number of rational choice strategies, including the prisoner’s dilemma, Nash equilibria, hawk/dove games, markets, reputation, and an odd characterization of legal courts. Following Nick Szabo’s earlier discussion of smart contracts, Buterin focuses much of his discussion of cryptoeconomics on Schelling points. Schelling points, or focal points, are a game theory concept developed by Thomas Schelling in his book The Strategy of Conflict (1960). The strategy allows two or more parties to reach agreement in an environment with little information and no possibility of communication. The key insight of Schelling’s theory is that coordination is easier when people’s attention is drawn to prominent or focal points. Schelling offers the example of two people in New York who need to meet in an undetermined location without having prior communication. According to Schelling, on game theory assumptions, each party will likely pick Grand Central Station because in a world in which many possibilities are equally likely, humans look for patterns or unusual focal points of reference. The assumption made by each party is that if I think Grand Central Station is a good meeting spot, the other person may think the same. Similarly, in his descriptions of cryptoeconomics, Buterin offers the example of picking matching numbers from a list without coordination or communication (Vitalik Buterin: Cryptoeconomic Protocols In the Context of Wider Society, 2014). People will, according to the theory, look for something—anything—that makes one number stand out—perhaps an even number, or a number with many zeros, or a well-known lucky number. Thus, given the following numbers: 2349 65 22 100 932, both parties will likely choose “100.” In Western, decimal-based numeracy, 100 “stands out” from the rest of the numbers, and therefore, lacking any other way to coordinate, the rational choice is to assume a common set of beliefs with the person you are trying to coordinate with. Of course, these choices are culture and context specific. With numbers, other patterns might be significant (such as “lucky” numbers), and the same goes with meeting in New York: as times, people, and places change there might be other possible focal points—Times Square, One World Trade Center, Brooklyn Bridge, or the New York Public Library. In these scenarios, all available options might be “weak” focal points. Consider the following scenario where there might be only weak focal points: negotiations between a workers’ union and a business break down and cannot make progress. On the theory of Schelling points, this might be due to lack of strong focal points, in the sense of shared interests and values. Until some stronger focal point can be found, coordination will not be effective. On the other hand, some focal points are very “hard”—so hard that they curtail negotiation. For example, in most of the Western world, the price tag on a retail good is not usually an invitation to start haggling (Szabo, 1997). The stated price is a hard focal point that communicates the context and sometimes the parameters of the contract. While the use of Schelling points is quite powerful and can be used to carefully navigate social contexts, it is not without issue. At its heart, like all rational choice and game theory strategies, a rational (or maximizing) actor is usually assumed, along with some kind of contractual framework or rationality. Fundamentally, cryptoeconomics fails to fully recognize that actual societies are also the result of war, exploitation, racism, and patriarchy (Held, 1987, p. 113). Patriarchy is an especially important value to consider for cryptoeconomics, since complete freedom and equality—the ability to sincerely engage in contractual negotiations—is a uniquely male capacity in most modern contexts. Rational choice or game theory assumptions lead to a shallow view of human sociality, which is likely to produce bad ethics and/or lead to significant errors in use and development (as with The DAO in 2016, see Chapter 8). One alternative to this kind of rationality, suggests Virginia Held, is to focus on “relations of concern and caring and empathy and trust” rather than a fiction about ideal contracts (Held, 1987, p. 125). Such a suggestion does not mean that we should dismiss the role of contracts in society (“smart” or otherwise), rather it implies that contracts themselves are embedded in social contexts.
zby 9y ago
I really like what Buterin writes - but Cryptoeconomics is a misleading name - it more like crypto-game-theory i.e. much narrower than the name suggests.
- tinkerrr 9y ago
  This article isn't written by Buterin.
  - zby 9y ago
    But he coined the name.
nannal 9y ago
>This approach has historically been thought of as insecure (the nothing at stake problem and the long-range attack have been two of the major unsolved vulnerabilities), but Vitalik and team have been diligently working on solutions to these problems. Ethereum now runs on proof-of-work, but the expectation is to switch to proof-of-stake in the next 12–18 months. Well with all the other stuff on his plate solving a very difficult problem in the next 12-18 months will be easy and luckily there's no actual time limit aside from the same one he baked into etherium.
rnernento 9y ago
Lest anyone be confused this is an obnoxious and not so subtle sales pitch for Ethereum, it isn't particularly informative.

Cryptoeconomics 101

264 points by ntomaino 9y ago

bmh_ca 9y ago

Wow. It's just distributed signed ledgers.

andirk 9y ago
I think the security an inability to double spend is pretty important too. The ledger is the proof but not the means.
- bmh_ca 9y ago
  Isn't a double (n+1) ledger the definition of the inability to double spend (presuming Atomicity or reconcilability)? That's a genuine question.
  - bhaak 9y ago
    It's distributed. You can't presume atomicity. The consensus rules ensures that everybody (eventually) stays on the same chain and the PoW mechanism ensures that (after a few confirmations) it would be too costly to change the blockchain for a double spend.
DennisP 9y ago
Plus smart contracts, in Ethereum's case. As a very rough analogy: Bitcoin is a massively replicated database with a single table having accountid and accountBalance, with a stored procedure that lets you transfer some of your own account's balance to any other user. Ethereum is a massively replicated database with that same table, but you also have developer rights. You can make your own tables and stored procedures, and other people can use them. (Some reasons that's just an analogy: they aren't actually SQL databases, Bitcoin uses UTXOs instead of accounts and has limited scripting, and Ethereum's "stored procedures" themselves have accountIds, with their own balances.)
- kochthesecond 9y ago
  The post insinuates that the etherium scripting language is Turing complete. How can that be safe?
  - geedy 9y ago
    You will have to define "safe", but in general things like infinite loops are effectively bound by the amount of gas provided. Mistakes are still expensive, and it is easy to get the code wrong (the DAO hack and quadrigacx screw up this week are obvious examples), but the network itself is fairly stable, which is priority number one.
    - pault 9y ago
      Is there an analysis/post-mortem on the QuadrigaCX snafu anywhere? I would be very interested in reading a detailed account of exactly what went wrong.
      - DennisP 9y ago
        Here's their comment: https://www.reddit.com/r/ethereum/comments/6ettq5/statement_on_quadrigacx_ether_contract_error/ https://www.reddit.com/r/ethereum/comments/6ettq5/statement_... Also, it's normal practice for a contract to throw an exception if ETH is sent to any function that doesn't know how to deal with it. This includes the "fallback function," which is what runs if no other function in the contract is called. With recent versions of Solidity, this throw is built in, unless you mark a function "payable." But they were using an older contract, and there was no protection built into their fallback, and that's what made them vulnerable to this issue in the first place.
  - DennisP 9y ago
    Indeed it is, aside from the fact that you pay a transaction fee for every step so at some point you run out of money. Some other things that run on Turing-complete code: passenger jets, medical equipment, self-driving cars, and nuclear reactors. I write and audit Ethereum scripts for a living. It takes a lot of care, but it's manageable because the scripts are typically under a thousand lines total, implementing simple business rules rather than complicated algorithms. It's feasible to make it very solid if you take your time, make the code as simple and clear as possible, write lots of unit tests, hire expert review, publish the code and maybe post a bounty. It's also good practice to build in something to handle emergencies, just in case. People are working on formal verification for Ethereum contracts, so down the road we should be able to actually prove their properties.
fragsworth 9y ago
If it were that simple, we'd have had online currencies a long time ago.
msutherl 9y ago
re: most other software: "Wow. It's just a relational database."

deleted 9y ago

[deleted]

rrggrr 9y ago

From an earlier comment yesterday:; Etherium is a panacea for anyone hoping to reduce contractional friction, and I believe we're at the tip of the tip of the iceberg if the tech and ether are here to stay. Bitcoin, on the other hand, still concerns me. If/when BTC is makes its appearance in the every day lives of ordinary people, its anonymity value will have eroded significantly. Traditional currencies have not yet started to compete with BTC, but they can and they will if necessary. Try getting a mortgage, car loan, business loan with BTC as collateral as one example of where my concerns rest. Look at the grossly inverted price of BTC and gold prices (artificially assuming 1BTC = 1Oz). Before BTC there was growing dissatisfaction with money center currencies that persists today. BTC 'took the edge off' for many in those circles and may have relieved pressure on gold prices. I don't necessarily believe this, but I've read in economic revisionist circles that BTC would be means for certain central banks to redirect some demand and attention for precious metals away from their vaults and toward an asset class they, better than anyone, are capable of mining with their existing computing infrastructure. So, by invention or acquiescence, BTC serves money center interests, for now, but not indefinitely. BTC remains a highly speculative and risky asset/network in my mind.

codesushi42 9y ago
I think the killer drawback to BTC will be the implementation of its proof-of-work consensus which present these major issues: - The throughput for BTC transactions is incredibly low and will not improve significantly in the future. In theory, its block-time is 10 minutes, in practice it can take as long as 20 minutes for a single transaction. This is in fact by design and deters attackers-- more frequent blocks make it easier for competing chains to get out of sync. In comparison, Ethereum has 15 second block times, 3 minute verification. It fixes the security risks with an implementation based on GHOST. - BTC mining is highly centralized and expensive. By 2020 it is estimated the amount of electricity used globally to mine BTC will be as much as Denmark consumes. Ethereum already decentralizes mining by nullifying the advantages of using ASICs. And it will fix the energy consumption issue by switching from proof-of-work to proof-of-stake. BTC will be seen as the first effort that introduced the blockchain to the public. But I doubt its longevity. We have witnessed this multiple times with tech. Consider: - Personal computer (Altair, Apple, later Commodore, Tandy, Atari) - Internet (Altavista, Yahoo) - Social web (Myspace, Digg) - PDAs and mobile phones (Palm, Nokia) In each of these scenarios, a second generation technology always came along and ate the lunch of the one first out of the gate. Why? Robustness (more use cases, platforms), efficiency/cost, and more user friendly.

daraosn 9y ago

Yes, cryptocurrencies and tokens have a lot of speculation from a dollar price perspective, and there are still non-believers and manipulators, but the blockchain and smart contracts technology is brilliant and the idea is already on people's mind, and it will only become stronger, despite of the price. Social Network: For years I've seen people complaining about Facebook, others building alternatives. If there is one way that Facebook could be defeated and decentralized is by using a P2P blockchain social network. Take for example Steem, not perfect but proof of concept works. Advertisement: another example is BAT (by the JS inventor), funded in 30 seconds, it could be a real threat to Google. Just pair it with Mist browser and ENS, and you can see the potential. ... I think it's no longer about Bitcoin, it's about a profound decentralization of the Internet. Some call it the Web 3.0.

darawk 9y ago
While I think we ought to be skeptical of "tons of money poured in, therefore it's a good idea" sort of arguments, I agree that there is definitely value here. Cryptocurrencies promise to nativize scarcity on the web. The absence if which has led to some amazing things, but has also caused some troubles. Ideally, we'll now be able to capture the best of both worlds. A free and open internet, but with opt-in monetary incentives and scarcity.
- serhei 9y ago
  There's definitely value in cryptocurrencies, in the sense of significant promise of being useful for new types of financial instruments and transactions. This does not preclude the possibility of there being a crypto bubble, i.e. demand/excitement causing the price of the currency to rise far far above its current level of usefulness. The ultimate usefulness of cryptocurrencies is determined by things that may take years or decades to figure out a way to do: everything from 'is it a good store of value' to 'can I shop with it on Amazon?' to 'can I use it to issue equity for my startup?' This gradual growth in usefulness does not really match the tendency of coins to double in price in very short periods of time, so the question is whether the temporary bubbles and disappointments are severe enough to disrupt the gradual growth in base value. This is no different from real estate bubbles potentially making things painful for people who just want to buy a house to live in it.

Uptrenda 9y ago

I've been searching for the perfect word that encapsulates everything we do in the blockchain space and I guess "cryptoeconomics" is really the best fit. It talks about crypto but it also alludes to the motivations of participants in one word and seems to be able to be applied to both blockchain engineering and smart contract protocols. I guess I'll be using this term in the future

ntomaino 9y ago
Yes. Financial incentives are the lowest common denominator that we have as people. Cryptocurrencies align people with this lowest common denominator.

irln 9y ago

An understanding of how to authenticate the blockchain and transactions is obviously essential, however, I haven't seen the same level of discussion on the affects of managing (or lack of managing) the crypto-currency's money supply. With bitcoin the total number is finite. With etherium, it appears that money supply management is being debated. IMHO this management of the money supply is a huge issue.

alanfalcon 9y ago
At any given time the supply of etherium is what it is, as with fiat currency. It's still finite, even as it continues to grow. The value of etherium is a function of the current and anticipated future supply, just as the value of Bitcoin is a function of the expected current supply (some amount is known to have been lost, some amount is "known" to have been lost, some amount is expected by some parties never to be touched again, etc.) In practical terms I don't see how this is necessarily a huge issue in the one case and not in the other.
- irln 9y ago
  > In practical terms I don't see how this is necessarily a huge issue in the one case and not in the other. In the case of fiat currency, the supply of money is based primarily on 1) Increases/Decreases in the loans provided by banks and to a lessor extent 2) a central banks balance sheet. I don't believe it's possible to add to the supply of bitcoins simply by loaning them into existence vs. fiat currency. That is, there isn't a closed-loop system similar to the banking system that allows for this elasticity of bitcoin units. I'm not advocating that this is a requirement or even desirable, it's just a limitation that I don't see often discussed.
  - icebraining 9y ago
    I don't believe it's possible to add to the supply of bitcoins simply by loaning them into existence vs. fiat currency. Of course you can. People deposit BTC in your bank, and you then loan that out to others while telling the depositor that they can withdraw at any time.

jancsika 9y ago

> Decentralized P2P systems based on cryptography were not new in 2009 (you probably heard of Kazaa and Bittorrent prior). What these earlier decentralized systems lacked was economic incentives, and the lack of baked in economic incentives is arguably what stifled these early P2P systems from persisting and thriving over time. Both Kazaa and Bittorrent worked because of economic incentives. For example-- if you visited what.cd before it got shut down, you would find all these beefy seedboxes just sitting there waiting to shoot data at noobs to improve their ratios. If there's a distinction to be made, it's that the P2P filesharing ratios aren't fungible.

msutherl 9y ago
And now you find the same thing at http://apollo.rip http://apollo.rip or http://redacted.ch http://redacted.ch, almost exactly as it was.

kneel 9y ago

This submission is an ethereum pump article. It has never made sense to have turing complete currencies. Ethereum will continue to be a great idea in the short term and a terrible idea in the long term.

a_imho 9y ago
The article lacks any details what should one buy cryptocurrencies (btc and eth) for, besides gambling on them of course.
johnnydoebk 9y ago
I agree. No offence but this is an /r/ethereum quality content.
Fej 9y ago
Yeah, I got that vibe around > I believe in 50 years, cryptoeconomics may be a discipline as widely studied as physics and Satoshi may be as widely revered as Galileo. Holy cow. I stopped reading at that point. Did the author read that over before publishing?
- jacobush 9y ago
  I can easily imagine a dystopian future where basic sciences are no longer taught and Galileo seems irrelevant and quaint compared to the everyday chores one must do to avoid being repurposed as stock for the local Soylent Green factory.
- shusson 9y ago
  I stopped reading at that point as well.
HXFIVE 9y ago
Yeah, I was expecting something insightful, but it's just an Ethereum promo. Nothing against Ethereum (although I'm personally not very excited about/interested in it).
andrewla 9y ago

danblick 9y ago

The main reason I don't own any bitcoin is that I don't think the economics of mining make sense in the long term. Specifically: bitcoin depends on distributed mining power in order to prevent individual miners from being able to manipulate the blockchain. However, if you accept that (1) there are economies of scale in mining, and (2) miners are rational and will only mine when they can make a profit, then I see no reason to believe mining power should stay "distributed" rather than develop into a monopoly. I realize this hasn't happened yet, but I don't think it makes sense to base a currency on such shaky foundations. The basic argument is also made in the paper discussed here: https://www.cryptocoinsnews.com/declining-profitability-for-new-miners-threatens-bitcoin-decentralization/ https://www.cryptocoinsnews.com/declining-profitability-for-... also: https://arxiv.org/abs/1603.05240 https://arxiv.org/abs/1603.05240 http://ieeexplore.ieee.org/abstract/document/7789434/ http://ieeexplore.ieee.org/abstract/document/7789434/

ohazi 9y ago
> I realize this hasn't happened yet Don't be so sure... there are already mining pools that collectively control far more than 50% of the network's mining capacity. This is supposed to be existentially problematic for bitcoin, but the majority sentiment appears to be ¯\_(ツ)_/¯
- danblick 9y ago
  The situation reminds me a little bit of the Keynesian beauty contest: what matters isn't what I think of bitcoin, it's what other people think. Do I think the average person buying bitcoin today is even aware of these problems? Not a bit. Are they going to wise up soon? Probably not. So maybe it makes sense to bet that Bitcoin will be popular and unaffected by these issues for a while. (I mean, you can still use it to buy heroin, right? Growth potential.) On the other hand, ignoring the long-term problems feels a little like knowingly buying into a pyramid scheme.
  - __Joker 9y ago
    Exactly, markets are based in perception. Doesn't matter what is the true value of anything, it depends what majority thinks. To quote GOT "Power lies where we think it lies".

trunnell 9y ago

It'd be cool to have digital cash, but I think we're decades away. Unfortunately, it seems that cryptocurrency enthusiasts focus more on the crypto than on the currency. To be taken seriously, there need to be realistic approaches to things like monetary policy. The ungoverned money supply of cryptocurrencies seems to be touted as a feature, but AFAICT, it's a fatal bug. Think of the money supply as the denominator and total addressable value as the numerator; the goal with a stable currency is to keep the ratio constant over time (or as close as possible). The fixed money supply of bitcoin is a joke. If the currency were successful, bitcoin's fixed supply (a constant denominator) wouldn't keep up with global growth (a growing numerator), which would make the currency more valuable over time. This would result in a deflationary spiral (no one spends the money b/c they're better off waiting and letting it appreciate, which leads to less spending, which leads to even more deflation, etc.) The etherium money supply is said to be TBD, but why would anyone be optimistic? Consider the layers of analysis underpinning the last Fed statement in May: https://www.federalreserve.gov/monetarypolicy/files/monetary20170503a1.pdf https://www.federalreserve.gov/monetarypolicy/files/monetary... A) political philosophy (for the Fed, the goal is to maximize employment and stabilize prices), B) macroeconomic understanding (for example, the relationship between money supply and growth), C) economic data collection (employment, prices, inventory, output, etc.) That's incomplete, but consider: how much of that kind of thing is even approached by any cryptocurrency community? Does anyone think the same kind of extreme care taken by the Fed is going to be replicated? When know-nothing articles like this one pass for news, well... let's just say the emperor's naked.

icebraining 9y ago
We already have electronic money - I can pay using electronic euros just fine. The point of creating Bitcoin was to make something different, a digital currency that couldn't be managed. What would be the point of creating a copy of existing currencies? I'm completely ignorant about the future of Bitcoin, but the reason I like it is because it's an experiment. If nothing else, at least it might serve as evidence for mainstream theories if and when it fails. In any case, it's not strictly true that Bitcoin's supply is fixed, you can have fractional-reserve banking.
- 9y ago

quinndupont 9y ago

I have a short section on cryptoeconomics in my upcoming book, which I'll post below (still developing, and still in draft). Unlike practically every other description of the "field", I don't take it for granted and don't uncritically adopt it. (Feedback always welcome!) <snip> The technological imperative of smart contacts and blockchain technology presupposes rational contracting, which leads to particular moral and epistemological positions. Early rationalizations of the moral and epistemological position of cryptographically-assured smart contracts can be found in Reagle (1996) and Szabo (1997). Since that time, several authors have further developed the concept, leading to what is today sometimes called “cryptoeconomics.” This emerging field deploys the technological affordances of (public key) cryptography: specifically, the ability to authenticate and verify parties; ensure non-repudiation of data; and in some cases, selectively reveal identities (as with blind signatures) (Chaum, 1982). Leveraging these cryptographic affordances, authors use the closely-related fields of rational choice theory and game theory to construct protocols and arrangements for creating social behaviours. In an early speech, Buterin suggests that, with cryptoeconomics, “as soon as you have a decentralized consensus framework that controls an internal asset and there is this valuation equilibrium where people care about it… the cryptosystem has the capability to have real world consequences…” (Vitalik Buterin: Cryptoeconomic Protocols In the Context of Wider Society, 2014). For instance, Buterin considers a number of rational choice strategies, including the prisoner’s dilemma, Nash equilibria, hawk/dove games, markets, reputation, and an odd characterization of legal courts. Following Nick Szabo’s earlier discussion of smart contracts, Buterin focuses much of his discussion of cryptoeconomics on Schelling points. Schelling points, or focal points, are a game theory concept developed by Thomas Schelling in his book The Strategy of Conflict (1960). The strategy allows two or more parties to reach agreement in an environment with little information and no possibility of communication. The key insight of Schelling’s theory is that coordination is easier when people’s attention is drawn to prominent or focal points. Schelling offers the example of two people in New York who need to meet in an undetermined location without having prior communication. According to Schelling, on game theory assumptions, each party will likely pick Grand Central Station because in a world in which many possibilities are equally likely, humans look for patterns or unusual focal points of reference. The assumption made by each party is that if I think Grand Central Station is a good meeting spot, the other person may think the same. Similarly, in his descriptions of cryptoeconomics, Buterin offers the example of picking matching numbers from a list without coordination or communication (Vitalik Buterin: Cryptoeconomic Protocols In the Context of Wider Society, 2014). People will, according to the theory, look for something—anything—that makes one number stand out—perhaps an even number, or a number with many zeros, or a well-known lucky number. Thus, given the following numbers: 2349 65 22 100 932, both parties will likely choose “100.” In Western, decimal-based numeracy, 100 “stands out” from the rest of the numbers, and therefore, lacking any other way to coordinate, the rational choice is to assume a common set of beliefs with the person you are trying to coordinate with. Of course, these choices are culture and context specific. With numbers, other patterns might be significant (such as “lucky” numbers), and the same goes with meeting in New York: as times, people, and places change there might be other possible focal points—Times Square, One World Trade Center, Brooklyn Bridge, or the New York Public Library. In these scenarios, all available options might be “weak” focal points. Consider the following scenario where there might be only weak focal points: negotiations between a workers’ union and a business break down and cannot make progress. On the theory of Schelling points, this might be due to lack of strong focal points, in the sense of shared interests and values. Until some stronger focal point can be found, coordination will not be effective. On the other hand, some focal points are very “hard”—so hard that they curtail negotiation. For example, in most of the Western world, the price tag on a retail good is not usually an invitation to start haggling (Szabo, 1997). The stated price is a hard focal point that communicates the context and sometimes the parameters of the contract. While the use of Schelling points is quite powerful and can be used to carefully navigate social contexts, it is not without issue. At its heart, like all rational choice and game theory strategies, a rational (or maximizing) actor is usually assumed, along with some kind of contractual framework or rationality. Fundamentally, cryptoeconomics fails to fully recognize that actual societies are also the result of war, exploitation, racism, and patriarchy (Held, 1987, p. 113). Patriarchy is an especially important value to consider for cryptoeconomics, since complete freedom and equality—the ability to sincerely engage in contractual negotiations—is a uniquely male capacity in most modern contexts. Rational choice or game theory assumptions lead to a shallow view of human sociality, which is likely to produce bad ethics and/or lead to significant errors in use and development (as with The DAO in 2016, see Chapter 8). One alternative to this kind of rationality, suggests Virginia Held, is to focus on “relations of concern and caring and empathy and trust” rather than a fiction about ideal contracts (Held, 1987, p. 125). Such a suggestion does not mean that we should dismiss the role of contracts in society (“smart” or otherwise), rather it implies that contracts themselves are embedded in social contexts.

zby 9y ago

I really like what Buterin writes - but Cryptoeconomics is a misleading name - it more like crypto-game-theory i.e. much narrower than the name suggests.

tinkerrr 9y ago
This article isn't written by Buterin.
- zby 9y ago
  But he coined the name.

nannal 9y ago

>This approach has historically been thought of as insecure (the nothing at stake problem and the long-range attack have been two of the major unsolved vulnerabilities), but Vitalik and team have been diligently working on solutions to these problems. Ethereum now runs on proof-of-work, but the expectation is to switch to proof-of-stake in the next 12–18 months. Well with all the other stuff on his plate solving a very difficult problem in the next 12-18 months will be easy and luckily there's no actual time limit aside from the same one he baked into etherium.

rnernento 9y ago

Lest anyone be confused this is an obnoxious and not so subtle sales pitch for Ethereum, it isn't particularly informative.