Crypto-economics For Beginners – What You Need To Know

Cryptoeconomics is what makes blockchains exciting and different from other technologies. This element is notable through the creative combination of cryptography, computer science, networking theory, and economic incentives. Now, we can build new kinds of technologies as a result of Satoshi’s white paper. Blockchain is a singular product of these crypto-economic systems that can accomplish milestones that these disciplines could not achieve independently.

Bitcoin, Etherium, Zcash, etc. are all crypto-economics’ inventions, explicitly focused on building different solutions. This article aims to explain in clear, simple terms crypto-economics and its relation to economic theory in general.  

What is Crypto Economics?

Crypto economics is a practical science which focuses on the design and characterization of protocols that govern the production, distribution, and consumption of goods and services in a decentralized digital economy.there are two central pillars of crypto-economics, as the name suggests:

  • Cryptography
  • Economics

Cryptography is the science of safeguarding information by converting it into a secure format. This process is also known as encryption, used repeatedly to prevent handwritten messages from being accessed by unintended recipients. Today cryptography is majorly used to secure digital data. It is a form of computer science that focuses on transforming information into formats that unauthorized users cannot recognize.

Economics is standardly defined as a social science aiming to satisfy needs and wants by production and quality services distribution. There are three kinds of systems in this selection that could be called ‘crypto-economics.’

Three Examples of Crypto-Economics

Consensus protocol

The consensus protocol is a fault-tolerant mechanism used in computer blockchain systems to achieve necessary agreements on a single state of the network or an available data value such as with cryptocurrencies. Proof-of-work is the scheme through which a blockchain can reach a consensus. This popular consensus algorithm is what many popular cryptocurrency networks use, including bitcoin and litecoin.

The Proof of Stake algorithm is an alternative for PoW at a lower cost, issuing a low energy consuming way for crypto transaction confirmations. This algorithm allows allocating responsibility for proper maintenance of all blockchain processes according to the digital currencies distributed. However, the one downside that comes with the process is promoting crypto saving instead of spending.

Other consensus algorithms like PoC allow the sharing of memory space of the contributing nodes on the blockchain network. The more hard disk or memory space a node has, the more rights it has authorization for the public ledger.

Crypto economic Application Design

Once blockchains solve the problem of consensus, they can build the applications that run on them comfortably. Cryptoeconomics is also usable in designing ICOs and other token sales. One area of application for this mechanism design is in the format of auctions and token sales.

However, many blockchain applications are not crypto-economics products, for example, Metamask and Status platforms that let users link with the Ethereum blockchain. Building these applications requires a comprehensive understanding of how incentives shape users’ behaviors. In turn, they can have an idea of how to design economic mechanisms that reliably produce a particular result. Also, you require an account of the capabilities and impediments of the underlying blockchain on which the application works.

State Channels

State channels are not applications but rather a valuable technique used by blockchain applications to become more efficient. A downside to blockchain applications is that blockchains are expensive since sending transactions requires fees. Furthermore, using ethereum to run smart-contract code is relatively costly to other kinds of computation. The main aim behind state channels is making blockchains more efficient by advancing many processes off-chain while still keeping blockchains trustworthiness using crypto-economic design.

Most blockchain applications in the future will use state channels in some form; it’s almost always a rigorous improvement that requires less on the chain operation.


Looking at the blockchain space through the crypto-economic lens is helpful. Once the idea is understood, different parties can finally clarify many controversies and debates flooding the industries. We should expect that there will be crypto-economic consensus protocols that do not rely strictly on a chain of blocks. Likewise, such a technology will have something in common with blockchain technology, but labeling them as blockchains would be inaccurate.

However, the relevant organizing concept is whether such a protocol results from crypto-economics, not a blockchain. One of the most tangible signs of a token’s value is if it forms a needful component of the application to which it is connected; therefore, understanding the design mechanism of a project holding an ICO is crucial in determining that token’s usefulness and potential value. 

Bitcoin live price
price change

We have moved from looking and thinking about this new field solely through the lens of one application, which is Bitcoin. It is the moment to think in terms of a more critical approach to solving problems of crypto-economics.                                    

Stay up to date with our latest articles

More posts

Here are the Benefits of Auditing Your Smart Contract with SolidProof

Auditing a smart contract is vital to ensure that the code functions as intended. SolidProof offers a wide range of services to help with this process. The company guarantees a sound audit process and an experienced team of auditors.  Here are the benefits of auditing a smart contract with a reputable company such as SolidProof: A wide range of services: SolidProof offers a wide range of services to help with the audit process, including code review, security analysis, and more.…

Smart Contracts Vulnerabilities Specific to The DeFi Space

As the financial world moves increasingly online, it's becoming more and more essential to ensure that all transactions run securely. One way this is possible is through the use of smart contracts.  Smart contracts are computer programs that automatically execute the terms of a contract. They provide a secure way to conduct transactions without relying on third-party intermediaries.  While the use of smart contracts offers many advantages, they are also vulnerable to attack. In this blog, we will explore how…

Malicious Attacks on Smart Contracts that Auditors Can Easily Identify

With many businesses adopting blockchain technology and Smart Contracts, offering reliable security audits in the industry has become increasingly important.  Businesses may protect their assets and contracts by recognizing and preventing harmful assaults. This blog post will explore the different attacks a group of criminals can carry on Smart Contracts. We'll also look at real-world instances of assaults to help you secure your contracts. What are Smart Contracts? Understanding the Benefits of This Technology What are smart contracts? They are…

How Smart Contract Audit Can Help Prevent Hacks

As companies move toward implementing smart contracts, the need for technical audits becomes increasingly essential. Having a third-party auditor check your contracts for vulnerabilities can prevent your company from suffering from a hacking attack.  What are Smart Contracts? A smart contract is a script that automatically carries out a contract's provisions. Smart contracts are self-executing, meaning that once the system verifies the meeting of pre-determined conditions, the contract will automatically execute. This eliminates the need for intermediaries such as lawyers…

Top 10 Ways to Earn Free Bitcoin in 2022

Here are the best ways to earn free Bitcoin when your purse is light. --- Are you interested in Bitcoin, but still hesitant to risk putting money towards it? Alternatively, are you looking to sat every sat possible, but lack the dry powder to buy more? Here’s a secret: you can put more bitcoin in your pocket without spending a dime – or even doing any real work.  That’s not to say you’ll earn much bitcoin without either of those…

Are Gold-Backed Tokens Worth Investing During Crypto Bear Market?

The crypto market is under the complete control of bears, investors taking short positions to profit from declining prices. In this unstable environment, new capitalists are fearful or skeptical when funding projects. Instead, they turn to more reliable assets that would not wipe out their portfolios when or if they flop. Gold-backed tokens represent a category of assets ready to provide portfolio stability and allow investors to overcome the bear market without too many losses. On the contrary, gold-pegged tokens…

What is Taro? Trading Assets and Currencies on Bitcoin

Taro leverages Bitcoin, lightning, and Taproot to enable the peer-to-peer transfer of currencies and assets beyond just BTC. —  Worried that Bitcoin is too boring to play within the growing digital asset economy? Fret no longer.  Using Taro, the original blockchain network can support the decentralized exchange of multiple assets – including fiat currencies. Moreover, the protocol works together with the lightning network, letting users transact – instantly and for free – with non-BTC-denominated balances.  Read below to learn about…

What is Fedimint? The Custody Solution to Bitcoin Privacy

Fedimint combines distributed custody with blind-signed ecash tokens to let Bitcoin users transact in private. --- Despite its growth, Bitcoin still faces some glaring limitations to reaching mass adoption as a fully censorship-proof payments network. One of them is privacy. Bitcoin’s ledger is fully open and public, meaning anyone can track another person’s transactions if they know his public address.  The other is a custody problem. While wallet software UX has improved considerably over time, many Bitcoin holders still store…

What Is a Crypto Bear Trap?

Cryptocurrencies are often incredibly volatile and can see massive price swings in a short time.  This makes them ripe for bear traps. A bear trap is a situation where traders wrongly think a coin is about to reverse a downtrend. These events often result in significant losses.  This guide will discuss crypto bear traps, how to identify them, and the risks involved in these situations. Introducing Crypto Bear Traps A bear trap happens when a trader buys assets, expecting the…

Understanding the GameFi Phenomenon

The GameFi industry is changing the way people think about gaming and finance. It provides a new way for gamers to interact with each other and earn money. It is also giving people a new way to invest their money.  The GameFi industry has the potential to change the way these industries operate. This guide will look more closely into this new business, covering several features. What Is the GameFi Sector? The GameFi sector is a crypto-based industry that uses…