1. The Cryptoeconomic Way

2. What is cryptoeconomics?

3. History of Decentralized Networks
Chaumian e-cash (centralized but trust-minimizing): 1982
Napster -> BitTorrent
Torrents in “enterprise” (eg. World of Warcraft)
P2P cash (1990s, 2000s)
Bitcoin (2009) ……

4. Cryptoeconomics is about...
Using cryptography and economic incentives to achieve information security goals
Cryptography can prove properties about messages that happened in the past
Economic incentives defined inside a system can encourage desired properties to hold into the future
Decentralization adds fault tolerance and security

5. Simple blockchain: Desired properties
Create a chain of blocks
Include transactions in each block
Maintain a “state”
Bitcoin: how much money does everyone have?
Ethereum: code and state of programs running on the blockchain
Transactions should update the state in a valid way

6. Simple blockchain: Desired properties

7. Goal: use economic incentives to reward participants who further the system’s objectives, and penalize participants who harm the system’s objectives.

8. Tools in the toolbox Cryptography Signatures Hashes (incl. PoW)
Spooky advanced stuff (ZKPs, timelock, etc)
Economic incentives
Rewards/penalties
Privileges

9. Why the cryptoeconomic way?

10. Why the cryptoeconomic way?
“Zero infrastructure” - your users are the infrastructure
Lower barriers to entry
Low social cost of bootstrapping
Easy to convince people to trust it
High security and reliability (fault tolerance)
Difficult to attack
Global; independent of national borders
Open; anyone can participate

11. Applications of cryptoeconomics
Consensus layer
Proof of work
Proof of stake
Second layer
Smart contract mechanisms
Gadgets (mechanisms that get used by other mechanisms)
Channel constructions (lightning, Raiden, Truebit, etc)

12. Note on public vs consortium chains
The cryptoeconomic approach is more useful in public chain applications, as in restricted-identity applications there are often legal/social ways of penalizing bad actors
However, there are sometimes parallels
“Fault accountability” in consensus

13. Why Ethereum?

14. Why Ethereum?
Seeming public consensus circa 2013: blockchains are useful for… stuff
Not just money! Asset issuance, crowdfunding, domain registration, title registration, gambling, prediction markets, internet of things, voting, hundreds of applications!

15. Problem: most existing blockchain protocols were designed like this:

16. Or, at best, like this:

17. So… why not make a protocol that works like this?

18. DNS: The “Hello World” of Ethereum
domains: {owner: address, ip: num}[bytes32]
def register(addr: bytes32):
if not self.domains[addr].owner:
self.domains[addr].owner = msg.sender
def set_ip(addr: bytes32, ip: num):
if self.domains[addr].owner == msg.sender:
self.domains[addr].ip = ip

19. Smart contracts

21. What is this good for?

22. Users Financial applications Payments Trading
Insurance (including P2P mutual insurance, etc)
Non-financial
Product authentication
Identity management

23. Users
Semi-financial
Decentralized markets for computation, storage, etc
Use cryptoeconomic commitments in various web applications