Kenji Saito, Ph.D. Professor, Graduate School of Business and Finance, Waseda University, Japan Session 4: Introduction to Cryptoeconomics — APO Training Course on Blockchain Application — 2024-04-03 – p.1/19
Business and Finance, Waseda University Collaborative Researcher, Keio University Global Research Institute (KGRI) Lecturer, Graduate School of Media Design (KMD), Keio University Chief Science Officer, BlockchainHub Inc. Representative Director, Academy Camp (some more non-profits) Bio M.Eng in Computer Science from Cornell University, 1993 Ph.D. in Media and Governance from Keio University, 2006 (on digital currency research) Researcher of P2P (Peer-to-Peer), digital currency, and distributed autonomous society for over 23 years at Keio and Waseda universities (started my career at Waseda in 2019) Holding Academy Camp for children in Fukushima (and now across Japan) with friends since summer 2011 (the year of T¯ ohoku earthquake and tsunami, and Fukushima nuclear accident) Session 4: Introduction to Cryptoeconomics — APO Training Course on Blockchain Application — 2024-04-03 – p.2/19
understanding of how economic principles, incentives, and game theory concepts drive the design, operation, and evolution of blockchain networks and decentralized applications The participants will learn about the economic foundations of Bitcoin and Ethereum (and their alike), anticipations and problems around crypto-economy (especially around misconceptions about NFTs), the idea of DAOs, and how the crypto economy may or may not work Session 4: Introduction to Cryptoeconomics — APO Training Course on Blockchain Application — 2024-04-03 – p.3/19
preview) Fungible and non-fungible tokens Economics and politics of DAO Session 4: Introduction to Cryptoeconomics — APO Training Course on Blockchain Application — 2024-04-03 – p.4/19
proof of work depends on the high market price of its native cryptocurrency Strength in this case refers to the difficulty of rewriting the records We will see why Session 4: Introduction to Cryptoeconomics — APO Training Course on Blockchain Application — 2024-04-03 – p.5/19
of dedicated hardware (CPU → GPU → FPGA → ASIC) Mining is (power) costly If the expected revenue is greater than the cost → more miners will join the market and invest in hardware → eventually the cost will go up If the expected revenue is less than the cost → some miners will leave (at least turn the hardware off) → eventually the cost will go down ⇒ The cost of mining balances with the market price of bitcoin The strength of the Bitcoin blockchain depends on the high market price of bitcoin since it is protected from tampering by the cost of mining (anyone trying to tamper with it will have to re-do the mining) Mining becomes collective (and a service you can join and leave) The collective behavior of the miners is subordinate to the economic principles of the bitcoin trading market Session 4: Introduction to Cryptoeconomics — APO Training Course on Blockchain Application — 2024-04-03 – p.7/19
participants gain half of the hash rate, blockchain cannot be guaranteed to work correctly Risky in principle if the hashrate is doubled quickly → It has happened On the other hand, what if it doesn’t double rapidly? → Dilemma of providing room for malicious participants What if it suddenly halves? → Very risky in principle, and it also happened Session 4: Introduction to Cryptoeconomics — APO Training Course on Blockchain Application — 2024-04-03 – p.8/19
reacts according to market price trends and forecasts Market price forecasts are the driving force Price is determined by the balance of supply and demand The supply of bitcoin is programmed — it is currently 6.25 BTC every 10 minutes on average, and will soon halve to 3.125 BTC (halving every 210,000 blocks) What about demand? Prices go straight up because the supply capacity of the source does not react (does not increase) to a rise in demand, and Prices go straight down because the supply capacity does not react (does not decrease) to a fall in demand Session 4: Introduction to Cryptoeconomics — APO Training Course on Blockchain Application — 2024-04-03 – p.9/19
(end) users users economic value transaction platform transaction platform user base user base technology adoption exchanges (special users) developers Example question : Will miners accept changes in core technology that improve fairness when it means replacing hardware? Session 4: Introduction to Cryptoeconomics — APO Training Course on Blockchain Application — 2024-04-03 – p.10/19
of stake also depends on the high market price of its native cryptocurrency The strength depends on how much it would cost to acquire a large portion of the staked token volume (so that it would become tamperable) In addition, there is now competition among blockchains in the market for gas, which represents the amount of computational resources How much does gas cost on that platform? How much gas is supplied per unit time on that platform? Ethereum is not necessarily the winner of the competition Session 4: Introduction to Cryptoeconomics — APO Training Course on Blockchain Application — 2024-04-03 – p.11/19
balance ETH Gas smart contract Calling by message transaction sign and submit Built into the block validator user process * Gas represents the amount of computing resources * Smart contracts will not work unless a user who pays for Gas usage in ETH submits a transaction Smart contracts are useful because they can be executed by writing program code and data to a ledger that is censorship-resistant in the broadest sense Ethereum Virtual Machine (EVM) executes smart contracts in Ethereum The user who wants it must buy the amount of computing resources with ETH, which means . . . Smart contracts do not work unless someone buys the gas ↑ One pitfall in realizing DAO Session 4: Introduction to Cryptoeconomics — APO Training Course on Blockchain Application — 2024-04-03 – p.12/19
driven by expectations of token value growth in the secondary market altcoins → ERC-20 tokens and ICOs → NFTs → . . . There is nothing new We have been doing the same thing for the past 400 years or so Session 4: Introduction to Cryptoeconomics — APO Training Course on Blockchain Application — 2024-04-03 – p.13/19
fungible or non-fungible Whether you are meant to be treated badly when someone borrowed a ticket from you, and immediately they returned another ticket showing the same quantity A 10,000 JPY bill? → fungible A concert ticket? → non-fungible NFT is conceptually a ticket, based on trusting the issuer An untrustworthy issuer can create countless NFTs that (allegedly) have the same meaning There are many issuers (or marketplaces) that may be trustable but do not write NFTs to the blockchain unless explicitly ordered (called lazy minting) Session 4: Introduction to Cryptoeconomics — APO Training Course on Blockchain Application — 2024-04-03 – p.14/19
B₁ … … blockchain B₂ … … smart contract C₁ smart contract C₂ Specific Storage Equal data is the same no matter where it is placed Whether the blockchain is the same or different, different instances of smart contracts have different definitional domains often not prohibited cannot prohibit it cannot prohibit it The method in which NFT points to data and the one in which data is stored do not differ in terms of uniqueness same smart contract C₃ smart contract C₄ NFT₁ NFT₂ NFT₃ NFT₄ NFT₆ NFT₅ cannot prohibit it cannot prohibit it cannot prohibit it cannot prohibit it cannot prohibit it Data A = designs that prohibit them are costly Session 4: Introduction to Cryptoeconomics — APO Training Course on Blockchain Application — 2024-04-03 – p.15/19
Can they make decisions autonomously? In other words, can you really say that they are not controlled by anyone? Session 4: Introduction to Cryptoeconomics — APO Training Course on Blockchain Application — 2024-04-03 – p.16/19
BUUIFDFOUFS ɹɹɹɹɹWT ɹɹɹɹɹɹ)VNBOTBU UIFDFOUFS "* IPMZHSBJM %BFNPOT˞ 'PSVNT˞ 8FC TFSWJDFT 3PCPUT %"0T %"QQT˞ #PSJOHPME PSHBOJ[BUJPOT ɹɹɹɹɹ)VNBOTBU UIFFEHFT ɹɹɹɹWT "VUPNBUJPOBU UIFFEHFT ˞%"QQ"TNBSUDPOUSBDUBQQMJDBUJPO %FDFOUSBMJ[FE"QQ ˞'PSVN"QMBDFXIFSFQFPQMFEJTDVTTBOEFYDIBOHFJOGPSNBUJPOPOBTQFDJpDUPQJD ˞%BFNPO"QSPHSBNUIBUSVOTJOUIFCBDLHSPVOEBOEBVUPNBUJDBMMZSFTQPOETUPFWFOUT There are some inconsistencies in the cube on the left, but we will leave that aside Buterin’s Definition of DAO (2014) Exists autonomously on the Internet, but relies heavily on hiring humans to take on specific tasks that the automated system itself cannot do Therefore, it has internal capital (which is used as a reward and drives humans) Autonomous decision-making Autonomous means not controlled from the outside Session 4: Introduction to Cryptoeconomics — APO Training Course on Blockchain Application — 2024-04-03 – p.17/19
the system is maintained because miners work hard to get the internal capital called bitcoin) Is Ethereum DAO? → Yeah well . . . yes? (humans seem to make decisions quickly, and a particular human group may be in control) Is what you created with a smart contract a DAO? → . . . Wait a minute, It does not run autonomously (it won’t work unless called upon) ↑ It could be interpreted as an applied system that is run by everyone as a whole Relying on voting by token holders to make decisions Proposals are written as smart contract code It is assumed that everyone can read the proposal expressed as code Who will implement the approved proposal (buy the amount of computing resources)? If it is a certain someone, that person seems to have veto power and effective control If anyone can do it, it can be easily attacked using obfuscated proposals ← Real-life cases Session 4: Introduction to Cryptoeconomics — APO Training Course on Blockchain Application — 2024-04-03 – p.18/19
on proof of work or proof of stake, depends on the high market price of its native cryptocurrency In the age of smart contracts, blockchains compete with one another in the gas market, where gas represents the amount of computational resources Trustless NFTs are not possible (although they can be transferred trustlessly) A DAO is not really autonomous if it is implemented with smart contracts Since cryptocurrency tokens are only supplied from the sources as programmed, their prices can be artificially inflated by stimulating demand If you do not want to be part of the scam, stay cool Session 4: Introduction to Cryptoeconomics — APO Training Course on Blockchain Application — 2024-04-03 – p.19/19
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