Ethereum Founder Vitalik Buterin Shares his Insights on Cryptoeconomics

Ethereum founder Vitalik Buterin, as he was interviewed by Tyler Cowen over a podcast by Mercatus Center, spilled the beans on what he calls as “Cryptoeconomics” and how markets dynamics are changing the world of cryptocurrencies.

He also touched upon points such as understanding the blockchain, his style of picking up languages, centralizations and ways a crypto could be valued.

Cryptoeconomics is nascent but holds the key to the future

Vitalik, the founder of the Ethereum protocol explained that cryptoeconomics, is economics specialized to a particular set of circumstances which needs to be fully specified exactly for its mechanics to work. According to him, cryptoeconomics follows the standards of a computer programmer and not that of a supreme court judge which means it doesn’t follow ethics which is not programmed to follow.

According to him

“Whatever your rules are for rewarding, penalizing inside of the mechanism, they have to be specified as a piece of Solidity code, Viper code, whatever programming language you’re using in that set. That’s a much tighter constraint than policymakers writing laws have.”

Cryptoeconomics takes economics with these constraints and adds together insights from fields that they are fairly close which could any to the likes of cryptography, information theory, math, and distributed systems, including all of the research around consensus algorithms, hash functions, signatures, zero-knowledge proofs, and what we know about all of those primitives.

According to Buterin, the one thing that economics could have given but hasn’t given yet is how to incentivize one’s behavior- what would motivate or demotivate a person to take certain actions.

Vitalik also feels that blockchains and cryptocurrencies have bought a cultural evolution that the technology itself integrates many aspects of decentralization in terms of how they’re produced and in terms of a way of living and collaborating and building things.

Cryptocurrency in part of a grand experiment

According to Vitalik, Cryptocurrencies are a part of a grand experiment of what happens if you create a financial system that really is fully frictionless, where moving bitcoin or ethereum from your wallet into an application, into a smart contract or whatever, really is as simple as logging into a website or clicking an email. According to him, it’s the cryptocurrency ecosystem that got people to accept micropayment which was assumed by a lot of people to be impossible.

With respect to future tech or engineering breakthroughs with respect to the blockchain, Vitalik believes any technology that provides scalability to blockchain transaction which is to process more transactions per second or the one that enhances user experience in terms of usability and security could make it.

When asked about the legal or regulatory environment which can help him accomplish his vision for ethereum, Vitalik said that not many regulatory changes can help as far as the technical development of ethereum is concerned. According to him the places where regulation can actually help is in developing the cryptocurrency environment by working on things like financial literacy.

He also believes that regulation still is very application specific and should be open to experimentation.

Vitalik on cryptocurrency valuation method

On valuing cryptos Vitalik mentioned that it depends a lot on the way the cryptocurrency goes. One way to measure the value, according to Vitalik, is to treat a cryptocurrency as a corporation that collects revenue through transaction fees, particularly in the case where the transaction fees either are burned or get redistributed to the cryptocurrency’s own proof-of-stake validators. In this case, cryptocurrency’s valuation is the net present value of the transaction fees that it’s getting. This, by itself, surprisingly does give fairly decent valuations.

The other way to value cryptocurrencies in their capacity as mediums of exchange. Then you have MV=PT (Fisher Equation) and all of these other models Each variable denotes the following:

M = Money Supply, V = Velocity of Circulation (the number of times money changes hands), P = Average Price Level, T = Volume of Transactions of Goods and Services.

There’s also this model of the store of value, where people hold it because they expect more people to hold it in the future and because people keep getting richer and the population keeps growing.

According to Vitalik more than the method, it was important to have a story for why it would maintain its value under a variety of different economic models.

Vitalik was very candid in its approach to answering Tyler Cowen’s variety of questions, from cryptoeconomics to valuation of cryptocurrencies.  There are still some points which he too was very vague on but still had enough to give insights.

Does Vitalik insight good enough to see the future of cryptos? Do let us know your views on the same.