Crypto Microeconomics Series: Role of Economics

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Crypto Microeconomics Series – Role of Economics

[dropcaps type=’normal’ font_size=’45’ color=’#191919′ background_color=” border_color=”]C[/dropcaps]ontinuing from the previous article, this post elaborates on the need for economics as we are examining micro cryptoeconomics and when we look at blockchain economics in general.

Micro cryptoeconomics reiterated

Micro cryptoeconomics is the fundamental approach that we use to approach cryptocurrency and the examination of cryptoeconomics. Cryptoeconomics uses cryptography, game theory, math, network, microeconomics in order to explain the problems and issues that we face when utilizing blockchains. It is primarily an incentive issue and that’s why there’s a need for game theoretic evaluations of incentives. It would, however, be myopic to simply think of game theoretic solutions and computing system solutions as the only solution to a problem with blockchains.

Why bother including economics into the equation? The explanation for this is extremely clear and can be shown in simple terms using two examples featuring the perceived rationality/irrationality of agents along with the role of incentives in a network.[/vc_column_text][/vc_column][/vc_row][vc_row css_animation=”” row_type=”row” use_row_as_full_screen_section=”no” type=”grid” angled_section=”no” text_align=”left” background_image_as_pattern=”without_pattern” css=”.vc_custom_1463146163185{padding-top: 50px !important;padding-bottom: 44px !important;}”][vc_column width=”1/3″][vc_single_image image=”63″ img_size=”full” qode_css_animation=””][vc_separator type=”transparent” thickness=”0″ up=”0″ down=”30″][/vc_column][vc_column width=”1/3″][vc_single_image image=”64″ img_size=”full” qode_css_animation=””][vc_separator type=”transparent” thickness=”0″ up=”0″ down=”30″][/vc_column][vc_column width=”1/3″][vc_single_image image=”65″ img_size=”full” qode_css_animation=””][vc_separator type=”transparent” thickness=”0″ up=”0″ down=”30″][/vc_column][/vc_row][vc_row css_animation=”” row_type=”row” use_row_as_full_screen_section=”no” type=”grid” angled_section=”no” text_align=”left” background_image_as_pattern=”without_pattern” css=”.vc_custom_1463146184322{padding-bottom: 70px !important;}”][vc_column offset=”vc_col-lg-offset-1 vc_col-lg-10 vc_col-md-offset-1 vc_col-md-10″][vc_column_text]

Irrational Agents in a Rational Crypto World

Agents – Individuals or firms > In our text this refers to both the Iranian plant workers and Iranian plant management. In the second example, it includes both the irrationality and will of the mathematicians and cryptographers which solved Engima and, irrationality of the Germans.



How did Stuxnet(malware) beat the Iranian Air-gap in Natanz nuclear facility? Examination of irrationality and Incentives

It did it through the utilization of an infected USB drive used by a plant worker. The most sophisticated defense that computer science said would work crumbled before the idea of convenience. Why did the agents that wanted to sabotage Iranian nuclear chambers do it through infecting USB drives? For they knew that it was with certainty that Iranian plant engineers would insert USB drives to transfer documents. This act caused serious damage such that the Iranian authorities went as far as to super-glue USB ports to prevent workers from using ports to transfer documents.

Why was there a need to super-glue shut ports when instructions to NOT use USB ports were so clear? A compromise would mean that the Iranian nuclear project would once again be subject to another variant of Stuxnet, or an even stronger malware variant. It was simply the cost-benefit analysis for which individuals carry out in minds.



Breaking the Enigma Code: A Cryptoeconomics perspective

ON 9 July 1940, Turing broke the Enigma code. Today the cryptanalysis of the Enigma code is remembered as the greatest step taken by the allies during World War II. So useful was breaking the communications for which the Kriegsmarine (German Navy of 1940) it single handedly compromises several high profile raids and developments. Turing was later awarded the OBE for his services to cryptography by KGVI.

What made Turing the figurehead of cryptography that all know today? There was no doubt that the Allies sent their best and brightest cryptographers, logicians, mathematicians to break the Axis cryptographic tools of which Engima is one of them. The Germans, however, failed themselves. Although they were continually suspicious of that the Enigma was being broken yet they took no real steps to increase the rotor count until their suspicions have increased beyond a reasonable doubt. By 1945, German transmissions across all branches (Army, Navy, Air, Policing) were being decoded within a day or two.

After the war, American cryptographers who met up with the German crypto team interviewed them. Through the interviews conducted, they realized that the Germans knew that Enigma was not invulnerable from being cracked. Rather they rationalized to themselves thinking that the Allies would never have had gone to such extreme lengths in order to break the Enigma. A similar interview with the Russians revealed the same, the Russians knew that Enigma could have been decrypted but thought that it took much work. The Allies did the impossible.

General Eisenhower later President of the United States, commented that the contributions of the decryption of the Enigma and its variants were a decisive factor for the win of the allies.

Until the day for which humans cede all control to AI(programmed to explain away the human condition) then behavioral economics and thus, cryptoeconomics as a field can cease to exist.[/vc_column_text][/vc_column][/vc_row][vc_row row_type=”parallax” parallax_content_width=”in_grid” text_align=”center” background_image=”66″ full_screen_section_height=”no”][vc_column][vc_separator type=”transparent” thickness=”0″ up=”0″ down=”177″][icons icon_pack=”font_elegant” fe_icon=”icon_quotations” size=”fa-lg” type=”square” custom_size=”45″ custom_shape_size=”40″ border_radius=”100″ border=”yes” target=”_self” icon_color=”#ffffff” icon_hover_color=”#141212″ background_color=”rgba(255,255,255,0.01)” hover_background_color=”#ffffff” border_color=”#ffffff” border_width=”1″][vc_separator type=”transparent” thickness=”0″ up=”0″ down=”35″][vc_column_text]

Wouldn’t economics make a lot more sense if it were based on how people actually behave, instead of how they should behave?

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– Dan Ariely

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  1. Introduction to Cryptoeconomics
  2. Crypto Microeconomics (Intro)
  3. Crypto Microeconomics – Basic Definitions in Cryptoeconomics Part 1 & Part 2
  4. Crypto Microeconomics – Role of Economics (Irrationality)

[/ordered_list][vc_column_text]Links to the Full Crypto Microeconomics Series

Introduction to Cryptoeconomics

Crypto Microeconomics (Intro)
Crypto Microeconomics – Basic Definitions in Cryptoeconomics Part 1 & Part 2
Crypto Microeconomics – Role of Economics (Irrationality)
Crypto Microeconomics – Extended role of economics

Crypto Microfoundations
Crypto Microeconomics – Microfoundations[underpinnings] of Cryptoeconomics
Crypto Microeconomics – Basic Models and Agents
Crypto Microeconomics – IO Perspective
Crypto Microeconomics – The Real Economy[/vc_column_text][vc_column_text]

References
Bamford, James (2001). Body of secrets: How america’s nsa & britain’s gchq eavesdrop on the world. Century. ISBN 978-0-7126-7598-7

Kahn, David (1991). Seizing the enigma: The race to break the german u-boat codes, 1939-1943. Houghton Mifflin Co. ISBN 978-0-395-42739-2

Winterbotham, F. W. (1974). The ultra secret: The inside story of operation ultra, bletchley park and enigma. Orion Books Ltd. London. ISBN 978-0-7528-3751-2, OCLC 222735270[/vc_column_text][/vc_column][/vc_row]