A Cryptoeconomic Circle
Cryptoeconomic circles provide a holistic view of cryptoeconomics.
Joel Monegro recently published an analysis of peer-to-peer economies illustrating abstract value flows through different classes of participants.
There are three parts to the model:
and investors (capital).
Each part is composed of three parties.
A token is the medium by which each group exchanges values based on the use of a limited cryptoeconomic resource.
Miners are compensated by tokens used by users in the circle in exchange for their work.
Cryptoeconomics controls how the miners are compensated and when the consensus protocol is used to standardize this process.
When the advantages of creating a distributed supply side (miners) outweigh the disadvantages, it is to design a network architecture that is supported by a distributed supply side. The advantages of this approach include censorship resistance, the absence of border crossings, and the ability to conduct transactions without interruption. Despite this, decentralized systems tend to perform less well than centralized ones.
Investors play a dual role in this model, providing liquidity to miners to sell their tokens, as well as capitalizing the network by supporting token prices that exceed mining costs.
In order to illustrate these two roles, the model divides investors into two groups:
traders (short-term investors)
and hodlers (long-term investors).
In order to help miners cover operating costs, traders create liquidity for tokens, while holders take advantage of the network to support token price growth.
In contrast, the miner-trader relationship involves a direct value stream, whereas the miner-holder relationship involves an indirect value stream.
To achieve economic goals in such an economy, every participant is dependent on the other. The design of this network ensures its reliability and security. In order to ensure that the network remains stable, each participant should comply with a motivated set of rules.