For nearly a century, the study of economics has been divided into many separate branches. Take macroeconomics, which looks at how the economy as a whole works, studying issues such as employment, gross domestic product (GDP) and inflation. Microeconomics, by contrast, focuses on how demand and supply affect the interaction of goods and services in individual markets. This divergence between macro and micro is institutionalized in economics.

Trying to explain this divergence has attracted the attention of many physicists as well as economists and game theorists. You may wonder: Is it that important? Perhaps, once you realize that the root of the problem is almost as important as the grand Unified theory of physics, it’s not surprising. We can think of this problem as a unified economic challenge-how to explain GDP, unemployment, business cycles, and price fluctuations in terms of first principles of individual behavior-and it’s a tricky one. Blockchain could be an important breakthrough point.

1

Blockchain: An economic laboratory

If you look beyond the speculative pricing and ICO levels of cryptocurrencies, blockchain is essentially a way to create a new economy. Blockchain technology can create new tokens or money (monetary policy) and distribute these tokens through economic incentives (mechanism design), which will create new business and economic forms.

In fact, each new token represents the emergence of a new economy with its own monetary policies and regulations. It’s important to note that it’s not just the internal rules of these new economies that are important, but also the rules of exchange between the new tokens — both between cryptocurrencies and between cryptocurrencies and fiat coins. So it’s all too right to call blockchain an economic laboratory. The economic laboratory was built on a base that was computable. The ledger that records all transactions in cryptocurrencies is guaranteed to be protected by cryptography, while a combination of distributed (consensus) algorithms and cryptography ensures trust between the parties.

2

What is the crypto economy?

One explanation of the crypto economy lies in the foundational layer: creating financial incentives for each computing node that contributes to the security of storing transaction data. A variety of consensus algorithms (proof of work, proof of equity, proof of authority, etc.) are applicable to this layer.

Another interpretation of the crypto economy lies in the application layer: using tokens as transaction vehicles creates economic incentives for participants whether they provide production value or consumption value.

In such an economy, scheme (mechanism) designers can use algorithms to create, allocate, or cancel new tokens (such as ERC20), providing economic incentives to encourage participants to behave in the desired way. The basic concept is not new. Now, for example, token rewards such as frequent flyer miles and membership points are used by businesses to stimulate spending. With the advent of blockchain, the scale of this token incentive is more open to discussion.

Of course, computer scientists are well aware of the challenges of achieving this scale — designing a system with 100 users working together is not the same thing as one with 10 million. Calculating size, however, is only one of them. The distributed and trustless nature of blockchain also ensures that solutions using tokens as economic incentives are economically scalable, allowing everyone to participate in transactions and token exchanges in a consensual economy.

It is the creation of new tokens to extend the scale and convenience of the new economy that poses the challenge. Solution designers must address a number of fundamental macroeconomic questions raised by the token economy: How many tokens should be issued? When will it be sent? How is it distributed? It is as if the scheme designers have become virtual central bankers; Strictly speaking, the process of designing algorithms is like the process of making these decisions, and the program designer becomes the central bank designer, and it is important to note the similarities between these design decisions and macroeconomics.

There is also a set of microeconomic questions for scheme designers to solve: how do these tokens generate value? What kind of economic interactions can tokens carry out? What motivates individuals to participate in the token economy? How will this economy ensure fairness and promote honesty? In game theory, incentives must be individually rational and incentive compatible. At Koinearth, we are creating the building blocks of this solution.

3

Micro-macro crypto economy

The divergence between micro and macro is also a challenge for the crypto economy; Add to that the scale and ease with which these new economies are being created, and the challenge is compounded. The conundrum of monetary policy, market design and economic regulation, once reserved for policy designers, central bankers and economists, has now been democratised. This is both a challenge and an opportunity. If the mechanism of the token economy is not properly designed, it will collapse sooner or later, to the detriment of all economic participants. But if the system is designed properly enough, it will unlock entirely new value by reducing transaction costs and contract enforcement costs — which is what the Coase theorem means. Time will see the emergence of entirely new forms of economies and institutions.

Markets are seen as the best place for the production and exchange of private goods. On the other hand, for non-private goods, the government needs to regulate and tax them, force egoists to contribute necessary resources, and restrain self-interested speculation… Scholars are slowly moving from simple systems to using more complex systems frameworks, theories and models to understand the many puzzles and problems faced by human interaction in contemporary society. — Ostrom Erno (2009), Nobel Prize in Economics acceptance speech.

4 Computer Science and Economics

So what should computer scientists do about all this? To understand this, let’s take a quick look at history.

In 1978, American economist Thomas Schelling published Micro Motivation and Macro Behavior. A key part of the book is to explain segregation of preferences. Schelling started the game with two different coins and blank squares of paper (he and his 12-year-old son circle the board and use the coins’ “preferences” (divided into copper and zinc) as simple rules. For example, the zinc coin, which is completely surrounded by the copper coin, will move to the blank square adjacent to the zinc coin. Each step will trigger the next step, until the board is completely divided into half copper COINS, half zinc coin), vividly explained to us the segregation problem: even though no one is absolutely refused to live in a mixed community, but because in a tiny preferences – community don’t have too many people who do not like you, or even just because preference in the community to some people who like you… It can lead to extreme equilibrium that looks a lot like extreme segregation. Schelling later won the Nobel Prize in economics in 2005 for “enhancing our understanding of conflict and co-operation through game theory analysis”. He wrote about nuclear conflict, climate change and apartheid during his lifetime.

Schelling’s work is also often cited as theoretical guidance by the field of Individual-based models (ABM) — a field of research that aims to explain macroscopic patterns in terms of microscopic (individual) behavior. ABM covers a number of social science disciplines. In particular, personal-based computational Economics (ACE) attempts to explain economic behavior in this deceptively simple but elusive bottom-up approach.

To connect these nodes, we treat each entity on the blockchain as an individual. Due to the distributed and open nature of blockchain, data from all transactions can be read by every node in the underlying P2P network. This is a rich data set, but once information about token design and incentives for allocating tokens is overlaid, it’s likely to be a gold mine. The ACE is likely to grow out of this gold mine, and we can explain it with the ACE.

Of course, we’re already there. The Internet and the World Wide Web not only changed the nature of social relations, but also facilitated their own research. Social relevance has changed not only quantitatively but also qualitatively. Technology not only makes people more connected, but also gives us a whole new way to communicate and interact. Social interactions like blogging, contributing Wikipedia entries, and collaborating on open source projects would have been impossible a few decades ago.

Just as the Internet has enabled new forms of social interaction, blockchain will enable new forms of economic interaction. As decentralized bookkeeping technology matures and the new economic model proposed by scheme designers, we will see the true significance of blockchain as an economic laboratory that encourages innovation and improvement. Computer scientists will not only build the system, but perhaps more intriguingly (hopefully) collaborate with economists to design and analyse these economies as they take off.

Just as Internet-led social interactions have allowed social networks to be studied on an unprecedented scale, so the crypto economy will allow us to study economics on an unprecedented scale. In principle, we should be able to study micro to macro effects (such as the effect of economic incentives on token price changes) from the most nuanced perspective. Similarly, we should be able to study macro to micro impacts (such as the impact of the creation of new tokens on individual behaviour).

Today, however, we have more questions: can the crypto economy scale up? Will the study of these economies produce insights that will help build a unified theory of microeconomics and macroeconomics? What role will ACE play in the world economy? What would Professor Schelling think of this if he were alive today?

Source: NervosNetwork

This article is best served with “Trust Engines in the Crypto Economy” by Jan

Geek race, 48 hours Blockathon | block chain marathon waiting for you to challenge (chengdu)

Time: September 14-16, 2018

Venue: China-Korea Internet + New Technology Incubator, 12th Floor, Building A, No.2 Jingrong International Plaza, No.200 Tianfu 5th Street, High-tech Zone, Chengdu

• Recruit 50 developers (to register by identifying the QR code below or clicking “Read the original article”)

• The registration fee of 100 yuan is the deposit for the competition. There is no refund for participants who cannot attend the event due to personal reasons. Participants will participate in the whole activity and be refunded at the end of the activity. The first check-in will start at 18:00 on 14th September. Please check in every morning on 15th and 16th September.

• The organizer provided free food and drinks for 2 days, and prepared a T-shirt for each participant