Whitepaper #1: Thinking In Blockchains
BY BRYCE WEINER · APR 3, 2014
Thinking in Blockchains
Defining the Cryptoeconomic System
This overly simplified whitepaper is intended to serve as an introduction to the mathematically demonstrable economic systems which exist within the cryptocurrency economy (‘cryptoeconomy’). It makes no attempt to argue this point. With almost $1,000,000,000 invested in over 500 altcoins, the debate over the profitability or viability of the ‘altmarket’ (the market of cryptocurrencies other than Bitcoin) has ended.
States in Transition
The cryptoeconomy is evolving at an explosive rate and as such is in a constant state of flux. This rate of flux seems unpredictable and expansive, but it has followed distinct patterns of development, evolution, and maturity. Emergent technologies within the space are barely recognized by their creators, much less by those who employ them. To place order to this chaos in a manner as rapid as the expansion, it is easiest to create new definitions and analogies to describe events as they have unfolded. The following assertions made by this whitepaper are immutable facts of the cryptoeconomy and are up for little debate but in the specifics. As Bitcoin is the standard from which all blockchain applications are derived, such comparisons are appropriate until the blockchain methodology itself is changed. Blockchain methodology creates which are termed the “Ba Zi”, or in translation from the Chinese “The Four Pillars of Heaven”.
Ba Zi of the Cryptoeconomy
As each pillar has specific application within cryptoeconomic calculations, some basic definitions within the art are required.
A New Definition of Value
Value is derived from cryptocurrency in inverse proportion to the simplicity of the cryptographic algorithm implemented. The mathematical simplicity of a cryptographic algorithm is expressed as a level of “elegance”. The more elegant the cryptographic algorithm, the greater the value potential a cryptocurrency network can support if implemented utilizing that algorithm. Elegance is the primary factor which determines the overall network value and long term viability of any cryptocurrency network. Statistical economic computations have been created which can measure the elegance of a coin network, however it is inappropriate to include such within this “10,000 foot view”. Supporting evidence and equations shall be provided in due course of time.
A New Definition of Money
As all wealth in the cryptoeconomy is created by the generation of hashes to solve cryptographic puzzles in a publically auditable and accountable process known as “Proof of Work”, the definition of “money”, “cash”, or “currency” then becomes “a unit of proof of work”.
A New Definition of Utility
Economic utility was originally derived from the science of physics and the calculation of the property of utility. Cryptocurrencies bring this definition full circle, as the very computations which create value within the economy behave according to the laws of physics. Computers are not necessary for cryptocurrencies to exist: their function within the cryptoeconomic system is to make such calculations so efficient as to be practical for the calculation of a unit of wealth. Comparative utility of any given cryptocurrency network can therefore be described as a function of elegance.
A Definition of Economic Potential
Economic potential is a derivative calculation of the utility of a coin network and exists within two states: ‘unrealized’ and ‘realized’. Unrealized economic potential is a purely mathematical prediction of the behavior of a coin network based on variations from the original Bitcoin design. Economic potential is completely unrelated to what is commonly mistakenly referred to as “rate of adoption”. The single greatest factor to the realization of a coin network’s economic potential is not adoption, but accessibility.
This whitepaper has established a common set of definitions by which further discussion of the dynamics of the cryptoeconomy might be had, and do so as a contiguous whole based upon demonstrable reality and solid statistical economic analysis.