L4 is building web 3.

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2 Hi, I m Josh Stark, L4 Co-founder (@0xStark) L4 is building web 3. L4 The Stable Fund Counterfactual

3 This talk is based on an article I wrote last year. Find it at L4.ventures/cryptoeconomics

4 This talk is about Cryptoeconomics What it is not What it is Why the idea matters

5 What is cryptoeconomics not?

6 1 Cryptoeconomics is not trend analysis

7 1 Cryptoeconomics is not trend analysis

8 Cryptoeconomics is not trend analysis

9 2 Cryptoeconomics is not just economics applied to digital assets like cryptocurrencies and tokens.

10 2 Cryptocurrencies and tokens are a new object for economic study and analysis, and these markets have particular features and qualities. But studying new kinds of markets and how people make choices in relation to financial incentives is still just economics.

11 What is cryptoeconomics?

12 Let s start with a definition. Cryptoeconomics is: The practical science of using economic mechanisms to build distributed systems, where important properties of that system are guaranteed by financial incentives, and where the economic mechanisms are guaranteed by cryptography

13 Let s start with a definition. Cryptoeconomics is: The practical science of using economic mechanisms to build distributed systems, where important properties of that system are guaranteed by financial incentives, and where the economic mechanisms are guaranteed by cryptography

14 Cryptoeconomics is: (1) The practical science of (2) using economic mechanisms to build distributed systems, (3) where important properties of that protocol are guaranteed by financial incentives, and where the economic mechanisms are guaranteed by cryptography.

15 (1) Practical science Cryptoeconomics is about building things. Bitcoin, Proof of Work, Ethereum, Proof of Stake, State Channels, Plasma, Sharding...

16 (2) Using economic mechanisms to build distributed systems Cryptoeconomics has most in common with mechanism design. Mechanism design is also called reverse game theory. In game theory, we might look at some game and figure out the best strategies for each participant. In mechanism design, we start with the outcome we want, and then build a game that will produce that outcome assuming the participants act in their own self interest.

17 (3) Where important properties of that protocol are guaranteed by financial incentives, and where the economic mechanisms are guaranteed by cryptography

18 (3a) Where important properties of that protocol are guaranteed by financial incentives (3b)...and where the economic mechanisms are guaranteed by cryptography

19 (3a) Where important properties of that protocol are guaranteed by financial incentives The only reason we have to believe that bitcoin (or ethereum) will still be producing new blocks tomorrow is that we believe people will continue to react to incentives in a predictable way Block reward, tx fees Gives us ability to guarantee a property in economic terms: If someone wants to 51% attack bitcoin, it will cost at least X

20 (3b)...and where the economic mechanisms are guaranteed by cryptography. In Bitcoin, SHA256 used to prove work SHA256 used to select random winners Hash functions one way property used to prevent easy altering of chain Public-private key cryptography used to allow exclusive possession of bitcoin Bitcoin could not work without these cryptographic mechanisms.

21 The fact that cryptoeconomics depends on financial incentives and cryptography is what makes these distributed systems possible. We have high confidence that these cryptographic primitives work the same everywhere We have high confidence that people react to financial incentives predictably This explains why distributed systems was in our definition earlier - cryptoeconomics is most useful in building these kinds of systems.

22 Consensus protocols are applied cryptoeconomics Proof of Work, Proof of Stake, Sharding, etc. How do we design a set of mechanisms that incentivizes many untrusting parties to reliably come to agreement about the state of a system? How do we do the above most efficiently?

23 Layer 2 scaling solutions are applied cryptoeconomics State channels, plasma, truebit, etc. How do we design a set of mechanisms that allows parties to conduct efficient off-chain operations while retaining a sufficient level of security for their needs?

24 Other applications or protocols are applied cryptoeconomics How do we design a set of mechanisms that incentivizes a group of people to engage in complex coordinated behaviour? E.g. decentralized prediction markets E.g. auction systems E.g. blockchain-mediated peer to peer markets for computation, storage, etc.

25 Why does this idea matter?

26 People treat blockchains like magic.

27 Blockchains are trustless People treat blockchains like magic. It is completely impossible to ever change any data once recorded in a blockchain!!1 Bitcoin is backed only by math

28 Cryptoeconomics isn t magic. It s just interdisciplinary.

29 Cryptoeconomics is here to stay. You can kill a blockchain, but you can t kill a widely understood and well-documented body of knowledge that we know can be used to build incredible things.

30 Cryptoeconomics is here to stay. You can kill a blockchain, but you can t kill a widely understood and well-documented body of knowledge that we know can be used to build incredible things. So go forth, understand, document, and #BUIDL.

31 Thanks! Read more: L4.ventures/cryptoeconomics