What is Crypto Economics?
You’ve heard the buzzwords of various cryptocurrencies like Bitcoin, but do you know what crypto economics is and how it works?
If you’re not into it and just want a peek into what the buzz is all about, here’s a brief primer to bring you up to speed.
It is not a simple subject, but this is a simplified overview 😊
First, a Couple Definitions
Before we get into what crypto economics is, let’s define a few key concepts:
- Blockchain a rather new technology devised by an anonymous person (or group of people) named Satoshi Nakamoto. It was created in January 2009 when a paper was released describing its use for BitCoin along with the release of the accompanying software. It allows information to be distributed but not copied, creating a new type of Internet, and it can be used in many types of applications.It is a decentralized peer-to-peer system. In the case of cryptocurrencies, it is a digital cash system that uses a monetary incentive to encourage people using it to abide by the rules.
- Node – nodes make up the blockchain. A node is a computer connected to the network, and it validates and relays transactions.
- Cryptoeconomics is simply the study of economics and cryptography combined as it is used in an adversarial system. (More on that later).
- Cryptography – in this context, it’s a way to encrypt the data. There are 4 parts to cryptography (which I’m not going to try to explain here): hashtags, signatures, proof of work, and zero-knowledge proofs. You can read more about the components here.
- Cryptocurrency – a digital currency. At its most basic level, it’s simply an entry in a database that no one can alter without fulfilling certain conditions.
So, crypto economics is the field of study that covers the vast network of digital currencies like Bitcoin, Ethereum, Bitcoin Cash, Dash, NEM, and more. There are an estimated 700 digital currencies in play worldwide.
How Big Is This?
Today, the cryptocurrency market holds over $140 billion in value, with large fluctuations. There are well over $600 million in digital currency transactions every day.
Some More Details
In any system, you’ll find bad guys who want to control things or hack things. The genius of this network is that it’s open to everyone and no single player controls it.
Every computer in the network gets a copy of the blockchain automatically. So, everyone is the owner or administrator. Technically, the network itself is the administrator. There is no one person or central entity who gets to control things.
Just like any currency, the value of a cryptocurrency like Bitcoin fluctuates according to supply and demand.
There’s a fixed amount of Bitcoin, but other currencies like Ethereum don’t have a set amount. In the case of Bitcoin, there can only be 21 million Bitcoin – max, and the supply decreases over time. It’s estimated that the supply of Bitcoin will stop somewhere around the year 2140.
How do you get them? Well, in the case of Bitcoin, you can mine them, meaning you solve a computational problem and earn Bitcoin in return. Or, you do work for someone who offers a cryptocurrency as payment. You can also sell something and require that the payment is made in cryptocurrency.
You can trade them (there are places online for that), or you can buy them. CEX.IO allows you to buy Bitcoins with bank cards or through a bank transfer, for example.
You need to get a “wallet” to store your cryptocurrency in, and there are varying levels of security available.
Mostly, people use the cryptocurrencies to pay for things, but investors use them as investments, as well. There is a lot of volatility in value. Sometimes a coin will rise in value 15% in one day – sometimes even 100% – only to lose 75% the next day. If you’re one of the lucky ones, your cryptocurrency’s value might increase 1000% in a week or two.
For More Info:
There are some great explanations of the intricate workings of the crypto economy at blockgeeks.