Decon’s Why: The reason we are starting Cryptoeconomics Lab

by | Jul 11, 2018

Start with why

There is an impressive Simon Sinek’s video named “Start with why.” It is one of the most view videos in TED, and it also has been published in books. The key message of this video clip is simple.

All great organizations and leaders always start from ‘why’.

You should talk about “Why we do this” first, and then move on to “What and how to do” since people tend to believe in an organization’s belief, philosophy, and vision rather than its product or services. In that sense, Decon Cryptoeconomics Lab decided to start with “Why” as well. The reason we set up Decon is to help blockchain ecosystem develop with our cryptoeconomics research. First, I will provide an in-depth explanation on what is cryptoeconomics and why it matters.

Cryptoeconomics to design an economic system upon a

blockchain

Cryptoeconomics is a field of research on “design” of economic system on blockchain.

As I mentioned in my previous article, cryptoeconomics is a “reward and punishment system,” simply put. As a teacher offers reward and punishment for getting students to behave well, cryptoeconomists design incentives and rules to make sure that blockchain participants act in the best interests of the entire network.

Although you might have misunderstandings due to the name, cryptoeconomics is not a field of research on market expectations or investments in cryptocurrencies/cryptoassets. Cryptoeconomics focuses on designing an economic structure of network that can be operated with cryptocurrencies.

Economics embedded in software

Then, why is cryptoeconomics necessary? Can developers just create a blockchain by themselves?

A blockchain-based service is completely different from typical internet services. A blockchain itself is a living organization.

The most notable feature of such organization is, as you know, it does not have a leader. Obviously, the reason an organization exists is to get the job done that cannot be done alone. To do so, an organization needs to establish order, and order needs rule and someone who enforces such rule.

However, if there is no leader or person in charge, how can such organizations work properly? A blockchain-based organization does not own a central entity that serves as a manager. That’s why we call it a decentralized network.

Designing a decentralized network is creating an organization that runs without a central entity where numerous anonymous and independent individuals are incentivized to act in the best interests of the entire network.

This is not an issue that can be solely solved with cryptology or computer engineering. Therefore, we must design a new “invisible hand.” By designing an inventive structure and economic system, we can create an environment where individuals pursuing their own interests lead to growth of the entire network. As a baker, a butcher and a brewer all work for their own interests so we all can have nice dinner — which is perhaps the appropriate analogy in this context.

To sum up, creating a decentralized network requires an economic design.

The first product of Cryptoeconomics — Bitcoin

Bitcoin is the first product that proved possibilities in cryptoeconomics. Creating a safe and decentralized currency had been a conundrum for a long time.

Satoshi Nakamoto managed to solve this problem in a new way that employs incentive structures.

Bitcoin is designed to incur a huge cost if a Bitcoin miner tries to manipulate Bitcoin ledger. Moreover, Bitcoin aligned the interests of participants by issuing its own currency, BTC, as reward.

In other words, Bitcoin designed an environment in which it is the miners’ interests to verify and maintain the ledger in honest manner. That is a reason Bitcoin has remained stable over 10 years.

Satoshi Nakamoto never used the term, cryptoeconomics, but after the birth of Bitcoin, cryptoeconomics has become the sine qua non of the blockchain system.

Bitcoin is not the last

In fact, what Bitcoin induces participants to do is simple; that is to get them to verify transactions in an honest manner. Yet after Bitcoin, a lot of projects applying the Bitcoin system to induce a variety of activities appeared.

The goal of such projects are to make high-level cooperation among more various participants such as betting on the future result they believe in, selling remaining storage spaces, or uploading and reviewing contents. As Bitcoin decentralized intermediary named bank, there are attempts to decentralize other numerous intermediaries all over the world.

The more parties interacts, the more complex, difficult as well as important the design of cryptoeconomics becomes.

The new possibilities of Cryptoeconomics

While taking principals of economics course when I was a freshman, I always thought

“Economics assumes that people are rational, but I do not think they are. Where can I utilize such knowledge that is based upon wrong assumption?”

Looking back, I believe my thought was half right and half wrong. People do not behave rationally but not completely irrationally as well.

Such theories based upon the assumption that people behave rationally serves as criteria of judgment. Thanks to economics research, we can make better decision than having no criteria.

Cryptoeconomics is the same. The incentive is not almighty solution. I admit it. People do not always react to incentive. Sometimes it harms inner incentives. This is why many people have skepticism towards term “cryptoeconomics” or “token economy.”

However, because of that, Decon has a strong belief in the necessity of cryptoeconomics research. Although the incentive is not almighty, if it is combined with a well-designed technology and economic system, that will enable a brand-new type of cooperation.

A decentralized network will get rid of the existing monopolist agents and create a new network in which all participants can build a win-win relationship. To promote such possibilities, we should experiment and come up with a better economic system.

Cryptoeconomics is hard

Decon members met in a community called Nonce. As we all studied economics/business administration, we have had special interests in economic system inside the blockchain. We had a lot of conversations about designing an economic system as we studied blockchain together.

How can we set an appropriate amount of a token to be issued?

How can we link the value of incentives and network?

How can we stabilize volatility of token price?

How can we manage several economic variables in network?

As we deeply ponder upon such questions, we realize the importance of designing economic system in variety of projects from core platform, middleware to Dapp.

But at the same time, we became aware that cryptoeconomics is very hard.

The reason is that it is related to human behavior and interactions. Modeling and predicting human behavior are too hard. Problems such as an abuse of the blockchain network in unexpected ways or low participation may occur.

We must take into consideration that an economic system should be designed according to the rules based upon computer engineering, and how human interacts with such rules.

Let’s suppose there is a network in which participants buy and sell remaining storage spaces of a personal computer. Put simply, the one providing storage space receives token, and the other using that storage space pays token. It seems designing an economic system is not that difficult.

But the reality is not so simple. For instance, after a provider sells storage space and a user wants to receive the saved file back, povider may be offline at that point of time. And there might be some file lost. Such incidents would never happen in cloud storage services managed by a professional company, but they can happen in a network composed of autonomous individuals.

So cryptoeconomists design the rule on deposit. For example of such rule, the system receives deposit from a seller in advance, and if that seller is not online when a user wants to download files, deposit should de deducted. It leads to such other questions to answer as when and how to return deposit, the amount deposit and how this deposit rule affects the entire token flow. That’s why cryptoeconomics is tricky.

Our belief got stronger as we met people in this industry. Even though their projects own good resources, team and technologies, many of them have inadequate economic systems.

A project we met with was able to raise quite a lot with IPO, however, it has not had an organized economic system yet.

To an another project, we asked “why this system needs token” and they answered “because it can be liquidated on exhcanges”, which had nothing to do with the value or utility of the token.

Such answer proves that people are lacking awareness in design of cryptoeconomics, and that cryptoeconomics is extremely difficult.

In reality, cryptoeconomics research is still in its infancy. It may not yet be appropriate to be called as a field of study. Proper theories, tools for design, and database of real cases are all still lacking.

But that does not close the possibilities in decentralization and cryptoeconomics. We rather believe since it is a difficult thing to achieve, an expert group for conducting in-depth research on cryptoeconomics is indispensable.And this is why we established Decon.

The vision of Decon

The vision of Decon is “to help blockchain ecosystem develop with our cryptoeconomics research.”

The blockchain and cryptoeconomics just took their first steps. We never know how successful an enormous experiment called blockchain will become, but it will never end meaninglessly.

With research on cryptoeconomics, Decon wants to help the blockchain ecosystem making an innovation that has no one ever done. Decon does not want to just jump on the key word “blockchain’” and rather hope to become a research lab striving hard for improvement and mass-adoption of cryptoeconomics.

3 Area of Decon’s work

At the moment, Decon is focusing on following three tasks. 3 tasks that we would like to conduct.

1. Research

In-depth research on designing an economic system based upon decentralized network is necessary. There are various topics including the framework for token model design, tools for token model simulation, establishment of design patterns based on purposes, economic mechanism to solve Oracle problem. We look forward to cooperate with many agencies and companies interested in research and development of cryptoeconomics. We will share research findings with the public in order to help the blockchain ecosystem develop.

2. Audit

We analyze the economic system designed by its project and investigate vulnerabilities. We provide credible audit that can be referenced by partner companies or investors of a certain blockchain project.

3. Design

We provide consultation for those projects that have business idea, technology or the user base but need outside support on designing economic system. It is akin to creating IT services in which planner provide a designer with plan and requirements and the designer assist the planner in visual realization. Decon advises clients on economic realization for projects from the concept phase to completion of the system design.