What is Cryptoeconomics? The Ultimate Beginners Guide
The entry of a person into the crypto industry involves familiarity with a considerable number of terms. One of the most important ones is cryptoeconomics. At first glance, this term may seem quite challenging to understand, but once you can figure it out, your approach to using cryptocurrencies can change a lot. A beginner's guide will help you quickly navigate the system and show all the economic benefits of blockchain.
What is crypto-economics?
What is cryptoeconomics? This term consists of "crypto" and "economics." If we take these two concepts apart, we can get a more precise definition.
Cryptography is the science that deals with encryption. In the digital age, it has become more sophisticated and progressive. It is used in various industries: banking, social media, logistics, etc. It ensures maximum data security. In addition, cryptography formed the basis for creating blockchain and cryptocurrencies.
Economics is the science that studies ways to meet the ever-growing human needs. In a narrow sense, economics allows you to learn which processes lead to financial well-being and which, on the contrary, lead to losses.
So, the cryptoeconomics definition says that it is a science that studies the protocols that govern the production, distribution, and consumption of goods and services in a decentralized digital environment.
At the moment, there is only one technology that fully meets the theory of crypto-economics, it is blockchain. It has a rather complex structure, but it ensures the functioning of cryptocurrencies in general.
It is worth noting that blockchain was not the first technology that worked based on a single-ranked network, but it became the only one that also uses all the principles of economics.
Why did the first one-ranked technologies crash?
So, the first one-ranked technology that gained immense popularity was torrent sites. They worked in a decentralized manner. Anyone could share here some information - image, video, music, text documents. They became available for general use. It could become such a utopia, where everyone contributes to the development of the site, and for this, it gets the opportunity to enjoy the benefits of other people.
The problem is that people did not have the economic incentive to create new files that took up a lot of space on their computers, which led to the collapse of this system.
Why is blockchain technology so popular?
Unlike torrent sites, blockchain considers the economic aspects of working with the system. It is its main advantage.
The first blockchain was created in 2008 by a person or group of people under Satoshi Nakamoto's pseudonym (real name is still unknown). It made a real breakthrough in innovative technologies and created additional opportunities. A year later, the world's first cryptocurrency, Bitcoin, was launched, which is still the most successful in the world today.
Satoshi Nakamoto created economic reasons for people to follow the rules and devised an ideal consortium system.
What is blockchain?
We have already said a lot about the popularity of blockchain but still have not considered what it is. So, blockchain is a distributed database. Each information is stored in a separate chain linked to others in different blocks. The blockchain works decentralized; there is no central computer from where the control is carried out. For the system's regular operation, several computer - nodes are used. These devices connect to the blockchain, store a complete copy of it, and participate in verifying transactions.
Each node checks:
- The real account of the sender;
- The amount they want to send or withdraw;
- Payment details;
- Additional points, if necessary.
The more nodes are created on the blockchain, the better the system works and the better the security of transactions. However, this dramatically slows down the process of conducting transactions.
Once all the transaction details are verified, the hashing process starts. Within its framework, the system generates codes consisting of numbers and letters. It is similar to generating complex passwords that we often use on various sites. Gradually, these codes turn into private and public keys. For convenience and acceleration of all processes, the concept of the Merkle tree is widely used here.
The system assumes the use of a sufficiently large number of nodes. It is pretty challenging to acquire such a large number of powerful computers. The point is not only in the economic component but also in the fact that they need to be stored somewhere and consume a lot of electricity. The system offers users the opportunity to rent their equipment and gives a small reward in coins for this.
The system charges a specific fee for each completed transaction. The money earned does not go into the pocket of one person, as is the case with the banking system, but goes to the accounts of miners and network maintenance. The central economic aspect allows the blockchain to exist and thrive. People are more willing to create files and provide space on their computers than torrent sites because they are rewarded. It is becoming the most popular form of additional passive income these days. Also, miners can solve complex cryptographic puzzles and receive more rewards for this. It requires enormous technical capacity as well as a great store of knowledge.
It is worth noting that blockchain is a complicated technology to develop, with an incredibly complex programming language. Satoshi Nakamoto made a gift to the public and left the code of the first blockchain public. Programmers worldwide can download it and use it for their own needs, modify it to fit their needs, and create new software based on it.
What crypto-economic requirements does Bitcoin meet?
Despite the crypto economy is a very young science, some rules can already be identified today. The secret to the success of the world's first cryptocurrency is that it has all the properties of a crypto economy. It would be best if you considered them in more detail:
- Created based on a blockchain, each block has a hash of the previous block, and as a result, a continuous network is formed;
- Each transaction has its separate block;
- All datum in the blockchain is unchanged;
- Only valid transactions are allowed.
Private and public keys are used here as signatures for payoff. It allows you to maximize the security of transactions while maintaining anonymity. All transactions made on the network are unchanged.
What determines the cost of cryptocurrencies?
Another trendy way to make money on cryptocurrencies is trading. The principle here is about the same as with fiat currencies. People register on the exchange, buy a coin, and then resell it at a better price. They take the difference in cost for themselves. To be as successful as possible in this industry, you need to understand what processes affect the value of a currency, how the price may change shortly. To create their forecast, traders must consider economic and political components in the country.
As for trading in cryptocurrencies, here, the currency's value does not depend on political problems at all; the central bank does not control it. However, you should pay attention to the following points:
- Whether the currency has been hacked recently;
- Is there potential to improve;
- Level of capitalization;
- The level of excitement and much more.
Even a person who is not connected with the world of cryptocurrencies is well aware that Bitcoin and Ethereum are often subject to sharp fluctuations in value. Usually, this is due to the so-called "whales" - these are people who are large holders of the currency. If one of them withdraws its assets, or at least gives a rumor about it, the currency's value can change dramatically. Usually, you can make perfect money on such races. So, for example, usually, the cost of Bitcoin fluctuates in the range of 58-60 thousand dollars. As a result of some actions of the whales, the price may even drop to the level of 30 thousand. At this moment, the demand for Bitcoin begins to grow strongly, and within 1 - 2 weeks, the currency returns to its previous positions and even starts to grow a little. Such jumps occur so often that experienced users do not experience much stress since they know that this is an opportunity to purchase additional assets at a lower price. The value will gradually return to its place.
It is important to note that this dynamic is only valid for well-known large-cap currencies. Today there are about 2 thousand cryptocurrencies; most of them are not as famous as Bitcoin and Ethereum, so one hack of the program or the withdrawal of money by a whale can lead to a complete collapse of the system.
It is worth noting that there are many messages on the Internet about hacker attacks. If the system cannot withstand the load and an attacker finds a vulnerability, this can lead to a complete crush. To prevent this from happening, the verifier conducts a full audit of all systems, studies vulnerabilities, and tries to improve protection as much as possible.
If positive actions must necessarily carry rewards in coins or other privileges, then wrong actions must also have punishments. For various atrocities, usually the extraction of illegal blocks or hacking, a person can lose a privilege or be ostracized by society. This model leads to the fact that most miners continue to follow the rules.
Such a system also operates in actual society. Anyone who does not follow the generally accepted rules must be punished.
Crypto economics is a rather complex science that studies the interactions between cryptocurrencies and humans. To adhere to general rules and create practical activities, you can receive a reward and punishment for evil actions. If you understand these fundamental concepts, you can successfully make money on cryptocurrencies and develop in this industry.