We are coming to the end of this series. As we have argued in part 1, blockchain technology urgently needs to solve the scalability problem. In part 2, we looked at the need for reliably integrating outside data feeds. For this concluding part, imagine a situation in which we have solved these issues and finally have automated decentralized systems with tokenized assets in place. We can interact with outside data and our systems scale really well. We still need to figure out how to make this new tokenized economy work. This is where cryptoeconomic primitives come in.
What are Cryptoeconomic Primitives?
Cryptoeconomic primitives can be defined as cryptographic tools that allow us to build decentralized economic applications. You will have heard of at least one low-level cryptoeconomic primitive: the cryptographic token, which serves as an abstraction for an asset.
Economic primitives also exist in the analog world. They have developed over time and form the tools used in international markets and business in general. However, blockchain technology has opened up a whole new way of doing business and enables economic applications previously not possible. These new applications require new building blocks.
Cryptoeconomic primitives are best explained using examples. We have already mentioned everyone’s favorite primitive, the cryptographic token. Tokens can represent anything of value from currencies to voting rights and even non-fungible assets, such as game characters or property deeds.
The token is a very useful tool and efforts aimed at interoperability and standardization will make it even more powerful. However, it is still a relatively low-level primitive. Tokens represent assets, hold a value and some other characteristics, and can be transferred. They do not provide built-in abstractions that facilitate more complex economic interactions.
Higher-level primitives are still being defined. Some emerging tools include token curated registries and prediction markets. The former is a tool that allows incentivizing users to curate reliable information. Prediction markets make future events tradable, based on the observation that markets tend to act in accordance with the most accurate information available. We have discussed the Augur prediction market platform in a previous article.
Stablecoins, such as Maker DAO’s DAI, are also a good example of a crytpoeconomic tool. Stablecoins try to provide a stable value in volatile markets. The problem with cryptocurrencies is that their value fluctuates a lot. Having a token pegged to something more stable, such as the USD, and backed by some collateral is very useful, not only for traders. However, current solutions to stablecoins are still not perfect.
Homework to be Done
The above examples are real cryptoeconomic primitives. However, they are still very experimental in nature. A lot of further research is needed to provide the tools that allow us to unleash the full economic potential blockchain technology could provide in the future.