Summary

Cryptoeconomics refers to the economic analysis of blockchain technology. This research area can be divided into two broad sub-fields. In that context, one sub-field is the study of economic mechanisms that seek to ensure successful transaction settlement on a blockchain. Such mechanisms are known as consensus protocols because they achieve transaction settlement by enabling all blockchain validators to form a consensus regarding which transactions have been added to the blockchain. More explicitly, if all validators agree that a transaction has been included in the blockchain and, further, if the validators will not deviate from this agreement in the future, then the transaction is deemed to have settled on the blockchain. The consensus protocol dictates both the incentives to generate the initial agreement regarding whether a transaction has been added to the blockchain and also the incentives for the initial agreement to persist indefinitely. The second broad sub-field within cryptoeconomics is the study of business applications that can be deployed on blockchain. Notably, when a blockchain is able to successfully generate transaction settlement, then the blockchain can serve as a commitment device for business policy. In particular, computer programs known as smart contracts can be deployed on a blockchain, and a properly functioning consensus protocol implies that the computer code within a given smart contract cannot be altered. To provide more detail, just as settlement of a peer-to-peer transaction implies that all validators indefinitely agree regarding the associated value transfer, settlement of a smart-contract deployment implies that all validators indefinitely agree on the code within the smart contract. In turn, when the blockchain’s consensus protocol is functioning properly, the deployment of a smart contract entails a commitment to the underlying computer code because the validators achieve consensus on that code. Importantly, within a business context, smart contracts can be used to commit to particular policies (e.g., pricing policy) by specifying those policies within smart-contract code and then deploying to a blockchain. Prominent business applications deployed on blockchains include decentralized exchanges and decentralized lending protocols. Decentralized exchanges enable trading of assets via a blockchain without an intermediary. Decentralized lending protocols enable borrowing and lending of assets via a blockchain without an intermediary.