A lot of people are talking about crypto-currencies these days but very few people understand the economics behind these currencies, especially because it’s a new concept and totally different from our current understanding of economics. The concept of cryptonomics is so new that it doesn’t have a Wikipedia page yet! When we think of traditional economics we think of a centralized bank backing a currency and the use of that currency as a medium of exchange for value.
In an economy run by crypto-currencies, there are can be a number of currencies and each issuing body acts as a sub-economy of its own. This model can be thought of as a Casino where your purchase the chips which are essentially local currency within the casino in exchange for money. Once the chips are obtained they can be used to bet on various games to earn more chips. At the end of the day, these chips can then be exchanged for money. Also, there is no centralized body backing these currencies. So the trust is established by a neutral technology of the blockchain that is highly secure and irreversible.
Cryptonomics can be termed as a science that studies protocols that govern the production and consumption of these currencies and distribution of services and goods in a decentralized digital manner. The term Cryptonomics indicates that it is a combination of cryptography along with economics. Economics is the study of how individuals and groups of individuals respond to incentives. The humans haven’t changed, so the invention of blockchain technology and cryptocurrency does not require a new theory of human choice. This implies that the concepts of supply and demand can be extended to cryptonomics as well. In addition to this blockchain functions on the assumption that every individual participates to maximize her outcome so the concepts of game theory are also applicable to cryptonomics.
Initial coin offering (ICO) is a key element in Cryptonomics. It is a process of creating tokens and distributing them to users in return for a network’s digital token (cryptocurrency).It can be seen as a novel distribution channel for assets. One of the most prominent ICO models has been the creation and issuance of digital tokens. As discussed, this is where the issued digital token represents access to some product or service that either already exists or will exist in the future much like the chips in Casinos. Buying these tokens can be considered as purchasing a “software license” that gives the holder the “right” to access the final product or service. However, unlike normal licenses, these issued tokens are easily transferable, either directly between users (over the counter) or through an established cryptocurrency exchange. This ease of transferability of the tokens on an exchange enables liquidity and thus drives price volatility based on the market’s perception of the issuing project. The theory is that if tokens provide access to a future product or service their value will increase as the product is launched and its usage increases.
Therefore, early adopters (ICO participants) benefi from the upside through capital gains of the issued tokens.Cryptonomics embarks the dawn of a new era of the way money is created and distributed.
In theory, it promises a future of financial freedom where individuals have access to financial resources which are currently accessible to few individuals, banks, and large corporations. It will be worthwhile to see whether cryptonomics continues to follow the principles of traditional economics or radically changes or re-defines them in the future.
Writer: Mudassar Shaikh MBA, M-Tech,PMP (Blockchain and ICO Consultant) works for @blcockchainmind