Bitcoin is a product of cryptoeconomics.
Bitcoin's innovation is that it allows many entities who do not know one another to reliably reach consensus about the state of the bitcoin blockchain. This is achieved using a combination of economic incentives and basic cryptographic tools.
Bitcoin's design relies on economic incentives and penalties. Economic rewards are used to enlist miners to support the network. Miners contribute their hardware and electricity because if they produce new blocks, they are rewarded with amounts of bitcoin.
Second, economic costs or penalties are part of bitcoin's security model. The most obvious way to attack the bitcoin blockchain would be to gain control of a majority of the network's hashing power – a so-called 51 percent attack – which would let an attacker reliably censor transactions and even change the past state of the blockchain.
But gaining control of hashing power costs money, in the form of hardware and electricity. Bitcoin's protocol intentionally makes mining difficult, meaning that gaining control of a majority of the network is extremely expensive – enough that it would be hard to profit from the attack. As of August 16, 2017, the cost of a 51 percent attack on bitcoin would be around $1.88 billion in hardware and $3.4 million in electricity every day.
Without these carefully calibrated economic incentives, bitcoin wouldn't work. If mining did not come with a high cost, it would be easy to launch a 51 percent attack. If there were no mining reward, there would be no industry of people who buy hardware and pay for electricity to contribute to the network.
Bitcoin also relies on cryptographic protocols. Public-private key cryptography is used to give individuals safe, exclusive control of their bitcoin. Hash functions are used to "link" each block in the bitcoin blockchain, proving an order of events and the integrity of past data.
Cryptographic protocols like these give us the basic tools necessary to build reliable, secure systems like Bitcoin. Without something like public-private key infrastructure, we could not guarantee to a user that they have exclusive control over their bitcoin. Without something like hashing functions, nodes would not be able to guarantee the integrity of the history of bitcoin transactions contained in Bitcoin's blockchain.
Without the hardness of cryptographic protocols like hashing functions or public-private key cryptography, we would have no secure unit of account with which to reward miners - no confidence that our record of past accounts was authentic and exclusively controlled by a rightful owner. Without a carefully calibrated set of incentives to reward an industry of miners, that unit of account could have no market value because there would be no confidence that the system could persist into the future.
In this way, bitcoin's design requires an understanding of both cryptography and how incentives affect the security properties and functionality of systems built with cryptography. Cryptoeconomics is strange and counterintuitive. Most of us are not used to thinking of money as a design or engineering problem, nor are we used to economic incentive design being an essential component of a new technology. Cryptoeconomics requires us to think about information security problems in economic terms.
One of the most common mistakes in this industry is made by those who view blockchains onlythrough a lens of computer science or applied cryptography. We have a strong tendency to prioritize the things we are most comfortable with, and see things outside of our domain of expertise as less important.
In blockchain technology, this leads
Cryptoeconomic systems like bitcoin feel like magic to someone who views them only as a product of computer science, because bitcoin can do things that computer-science alone could never accomplish. Cryptoeconomics isn't magic – it's just interdisciplinary.
Reference : coindesk.com
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