Cryptoeconomics is inherently a combination of economics and cryptography. Bitcoin, Ethereum, and all other public blockchains are products of crypto economics. The creator of Bitcoin Satoshi Nakamoto said that thanks to a smart combination of cryptography, network theory, informatics and economic incentives, the mankind can create new technologies.
Let’s consider crypto economics using bitcoin as an example. Bitcoin's innovation lies in the fact that it allows many actors who do not know each other to reliably reach a consensus on the condition of the bitcoin system. It is achieved by combining economic incentives and basic cryptographic tools. Economic rewards are used to attract miners to support the network. Miners participate in mining using their equipment and electricity. If they produce new blocks, they are rewarded with some bitcoins.
Economic costs or fines are part of Bitcoin's security model. The most obvious way to attack Bitcoin's blockchain is to gain control over the larger hashing of the network - the so-called "51% attack". It would allow an attacker to reliably censor transactions and even change the past state of the block. However, gaining control over the power of hashing costs money will require a lot of equipment and electricity. Bitcoin's protocol deliberately makes mining time-consuming, which means that gaining control of most of the network is extremely expensive - enough to make the profit from the attack very difficult. If mining did not have a high cost, it would be easy to launch a "51% attack". If there was no reward for mining, there would not be miners who buy equipment and pay electricity to contribute to the network.
Bitcoin also uses cryptographic protocols. Cryptography using public and private keys is used to provide people with secure, exclusive control over their bitcoins. Hash functions are used to "link" each block in Bitcoin's locker, checking the order of events and the integrity of the previously recorded data. Cryptographic protocols give us the basic tools needed to create reliable, secure systems, such as Bitcoin. Without strong cryptographic protocols, such as hashing functions or cryptography with public and private keys, we would not have a safe accounting unit to reward miners. Without a carefully calibrated set of incentives to reward miners, such unit could not have a market value.
Most of us are not used to thinking about money as a design or engineering task. In addition, we are not used to developing economic incentives that are an integral component of the new technology. Cryptoeconomics requires us to think about the problems of information security in the economic sense. Consequently, crypto economics is an interdisciplinary approach.
The term crypto economics can be misleading because it involves a comparison with the economy as a whole. Cryptoeconomics is not an application of macroeconomic and microeconomic theory for crypto-currency or markets. Cryptoeconomics, like the design of mechanisms, focuses on the design and creation of systems. As in our example, we use economic theory to develop "rules" or mechanisms that create a certain equilibrium outcome. However, in crypto-economics, the mechanisms used to create economic incentives are built using cryptography and software. Furthermore, the developed systems are almost always distributed or decentralized. Most often, crypto economics is used to provide a security guarantee for a distributed system.
The use of an interdisciplinary approach in crypto economics has ample opportunities for the global community. For example, the DANs token, which is based on the Ethereum blockchain, uses cryptography within the advertising network to sell or purchase an ad slot/time (
https://dan-service.com/). The owners of advertising space will be able to set the price in DANs tokens for a certain time of advertising. When the owner of the advertising space accepts the application, the tokens will be frozen until the owner proves that the task is completed, or the time for displaying the advertisement does not end. At the same time, the advertiser has the right to refute the payment for advertising, if it does not correspond to the declared quality until the tokens are frozen.
Tokens are transferred to the balance of the owner after the advertiser checks the quality of advertising. Some actions on the network will be stimulated by creating additional tokens, which will be transferred to the person who performed the action. It will ensure a slow inflation of the token so that there are enough tokens in the turnover for a healthy and efficient network operation. Consequently, economic rewards are used to support the network.