Layer 2 Stage | Intro to CryptoEconomics for Newbs

Captions as YouTube publishes them, usually machine-generated, so product and people names can be misheard.

1. 0:01

   as a finance person this is a very very important topic to me something that a lot of Founders struggle with they might have the best product on Earth but their cryptoeconomics and their toe economics are not always serving the product best and in order to understand how both of these worlds tied together it's really un it's really important to understand how cryptoeconomics work and for this I'm really happy to introduce Lisa tan from economics design to talk about this

2. 0:32

   on an interesting keynote about cryptoeconomics for noobs welcome Lisa Tan Hi hi everyone it's post lunch and I can see that everyone is sitting all the way at the back and there are a lot of people standing behind so if you want you just can come forward I'm not going to bite and you can just come forward to join us in the front so today I'm going to talk about an introduction to crypto economics and how is it different from token economics we're in a crypto event here today and everyone talks about

3. 1:03

   token economics as something as hype as something to invest in I'm not doing any of that I'm going to teach you the difference the fundamental difference between crypto economics token economics what you should think about when you're building your system whatever system that you're building so before we get started can I have a show of hands how many of you are founders here Founders or Builders one person right thank you for

4. 1:26

   coming everyone's working I guess okay and who else are VCS investors people interested in the pump of tokens okay we've got three four people all right and where are the rest of you guys from are you guys tourists here is this our first crypto event come on someone tell me where are you guys from if you're not marketing okay perfect I like that how many are marketing amazing okay all right I can see that where the marketing folks are here so I will try to tailor this to a bit more marketing Focus so it helps you

5. 2:01

   in your work as well and I make sure that my core focus is to get the builders the protocol Founders to understand what crypto economics is and how do we build a very robust system all right clicky click the clicky click doesn't work all right but it's okay I can get started oh okay right we're here today so I'll try to keep this within 10 minutes and I'll leave a Q&A open for

6. 2:33

   later a quick introduction about myself I'm the founder and economics the principal Economist at economics design so we are a consultancy firm I've worked with games worked with defi layer ones and Enterprises and we've been around for 6 years and we've got 14 15 people over four continents so I want to leave the 5 minutes of Q&A to give you guys a chance to ask me questions treat me as your chat gbt treat me as your Google ask me

7. 2:57

   the questions you've been wanting to ask chat g g GPT but CH GPT can't give you the answer and as a result the the P with the best question will get the version two of this book is not out yet I have two books in my bag and so I'll give one of you guys who ask the best question so let's get started I want to talk a little bit about what is economics then we go into economics 101 what is the difference between crypto

8. 3:20

   economics and token economics and then finally what to do after we understand what economics needs to be done this is relevant for marketing this is relevant for Founders and this is also relevant if you are in the investor investing team and you want to do some form of due diligence if you are in the listing team of an exchange you also want to do some due diligence how on Earth do you do that we'll do a little we'll check that

9. 3:42

   out lastly Q&A so I want to begin with a with a little quiz you guys have to raise your hands for this if I want to if I get a chance to build a brand new planet you know I'm not I'm not Elon Mar that will go to Mars let's say we build a brand new planet you've got two options here the first option is to define the countries the governance structure the loss the number of resources in place will there be gold underground will there be loss of trees how much water of oceans will this this

10. 4:07

    planet be option two you define the Newtonian physics as rules to govern activities on the planet so a raise of hand if you are The Economist of this planet if you're the creator of this planet will you who would choose option one that's option one is the first thing you want to do two three four okay and how many of you will choose option two option two is the thing you want to do

11. 4:29

    okay good amount a good balance all right so the things that we want to do as an economist is to focus on option two because economics is not about what is out there it's not about the the total supply of tokens it's not about how governance structured will be it's not about how people interact it's about what are the rules the main rules that even if the president you are the road people you are a regular person standing on the stage these rules all apply to

12. 4:54

    you this is Newtonian physics whether you're fat you're skinny you're elephant you're a chair if you fall you fall downwards because that's gravity this is a fundamental logic a fundamental rule that applies to everyone in on Earth on this planet and in a crypto equivalent this is a fundamental law of force that applies to all economic agent whether they're an investor they stake their tokens they are LP they are playing they're a gamer in this ecosystem these

13. 5:19

    are laws that apply equally to everyone and this is absolutely important in economics because we're not biased to anyone or any specific economic agent we want to create the right kind of laws that impacts this ecosystem and for this ecosystem to really grow and Thrive and this is where economics comes in economics in a very traditional view is the study of production consumption and distribution of goods in a very very simple understanding economics is really

14. 5:45

    just three things it's incentives disincentives punishments and behaviors when you think about the government increasing their interest rates or increasing more monetary M1 or M2 more they launching more more money in the space or different kind of economic policies in place it's not because the government is biased towards some kind of things what the government wants to do is to create incentives or disincentives to alter people's behaviors that's it that's what economics is about we want to alter

15. 6:15

    people's behaviors with the kind of rules that we have in place and this is what we want to do in the crypto space whether you're talking about cryptoeconomics or token economics it's all about creating the rules the rules that applies to everyone in the ecosystem to impact their behaviors that's it impacting their behaviors it's very similar to things that you do in marketing marketing has a little bit more psychological aspect here we're talking about rational rules in place to

16. 6:40

    impact people's decisions so what does that mean when we talk about creating brand new planets we creating brand new rules these are the questions that we want to ask what does it mean to build a brand new planet what are the rules we need to create what are these new rules in place how do we start thinking about the rules what are the constraints of these rules there are a lot of things to think about it's not the questions you should be asking it's not how how many What's the total

17. 7:03

    circulating supply of tokens uh can can what's the distribution of tokens what is the vesting period of tokens these are questions you can ask five steps down the road when we think about economics in its first right we want to understand what are these rules that will be embeded within the economic laws that we are writing so that is that's the answer that we're going to figure out towards the end of the the slides but right now I want to share a little bit more about the difference between cryptoeconomic

18. 7:29

    and token economics you hear these words a lot and they're actually very similar in a lot of aspects but they have very different ways of execution the shortterm answer the tldr is that cryptoeconomics talks about the economics of the base layer the blockchain layer things like NE protocol ethereum talks about the economics of the base layer very much focusing on the security the economic security of messages being

19. 7:53

    passed token economics on the other hand talks about the economics of an ecosystem the economics the rules in place to incentivize users to collaborate and coordinate with each other it's no longer about security and liveness and integrity of the messages being validated which is crypto economics token economics talks about the economics of an ecosystem and a structure so just you can get these

20. 8:17

    slides I'm sure later so I just want to run run you through because I want to focus on token economics and explain why is how do you build a robust ecosystem so the similarity is that token economics and cry economics all about economics again it's all about creating rules the right incentives and the disincentives the thing is you can create rules for very different intentions purposes and outcomes the economic policies of the Chinese government versus the Taiwanese

21. 8:42

    government versus the CH uh versus the US government versus the argentinan government they're all economics but the economic details and the way it's being executed is very different because it has very different intents purposes and outcomes so this is what I'm trying to tell explain over here so in crypto economics the B Bas layer economics what it wants to do is to honestly record information and talk about Economic Security if you look at the core

22. 9:07

    principles of crypto economics the core principles of blockchain layer there are two key features the first one is correctness and the second is lifeless these are two key features whatever blockchain you build on these are two key features it's very important so when we talk about economics over here we want to incentivize more correctness and liveliness so here we're talking about crypto security economic Security on the

23. 9:30

    other hand token economics is about incentivizing transactions within an ecosystem within an economy why do people come to the market this Market to trade and interact with each other because they want to trade they want to speak to each other they want to transact with each other they want to coordinate so we need the economic policies to incentivize this so in short cryptoeconomics is a study of the study of Designing properties used for to make it costly

24. 9:54

    for an Ever serial attack and to create incentives to honestly record information and this is based basically what crypto crypto is about what blockchain is about is to incentivize the validators to validate the transaction validate the right transaction and make it very expensive for adversary attack or different kind of or to go against B bisenti for attacks so you can get the slides later you can read more about it and talk

25. 10:16

    about the properties so the difference between crypto economics and token economics is that the economics goal in crypto economics is to minimize adversar attacks so here it's about cryptography Plus computer science engineering and math economics math added together to create the right economic policies on the other hand token economics is a study of the factors of production that affect and affect Define

26. 10:41

    and governs the ecosystem so this is a very different category of of Economics again you can take the slides and you can read them all later it's it goes into details and this is the slide that I want to end with which is how do you design an ecosystem we talk about crypto economics versus token economics it's very different crypto economics is all about the base layer economics and I'm pretty sure most of you over here are interested in token economics the

27. 11:04

    economics of ecosystems the economics of applications and we designed this in a three pillar framework the first one is Market design who is in the market who gets to participate in the market what kind of behaviors we want to incentivize in the market what kind of assets exist in the market here we're not talking about total total circulating Supply but here we're talking about are they fungible tokens are they non-fungible

28. 11:27

    tokens are they tradable tokens are there stable currencies that represent a medium of exchange are there are there assets that represent store of value just understanding detailing the parameters of this Market allows us to design the right kind of Market structure the second thing we want to look at is mechanism design in mechanism mechanism design these are the rules that people need to follow when they trade and transact with each other these

29. 11:51

    could be non-financial incentives this could be governance which we'll talk about later this could be the the economic structure how does bargaining protocol look like is that auction Theory coming into place to determine how users interact with each other so these are the rules that we have in place the mechanism design aspect and realize we have not even talked about tokens at all and in the last phase we finally talk about tokens and in tokens here we want to understand what other

30. 12:15

    tokens present in this economy what are the rules that these tokens need to follow we talk about programmable tokens and what does that mean what kind of rules do they need to follow when when they are executed and being launched in the market tradable non-tradeable funable non fundable it does not matter what it matters is it represents something at the end of the day the token is a means to an end it's a means to get people to behave in a specific

31. 12:38

    way you want them to behave according to your Market structure that you have agreed in the very first place so this is how we design an ecosystem we start with the market we move on and Define who is in the market when we create the rules who will these rules impact understand the incentives that will the incentives you want to create to drive them to interact with each other and lastly the the tokens in place to facilitate a means to an end to facilitate these

32. 13:03

    transaction so with that in mind I want to conclude with the learning points and then I just want to open I guess we've got time for two questions so the difference between crypto economics and token economics is it depends on the ecosystems you're designing if you're designing a blockchain ecosystem the most important thing you're talking about is economic security how do I make sure that there is no Hax there is no everal attacks whereas if you're

33. 13:28

    designing an ecos system you want to design an ecosystem to encourage economic participation and transaction within each other to token economics is based on economic transaction in the ecosystem because it's all about people coming together interact and collaborating with each other and finally there is no one perfect way to design an economy that's why the framework exists for you to understand how do I dissect the economy into three components dive into these three

34. 13:52

    components and do due diligence in that sense so with that I want to open open the floor to questions we have one and a half minutes yes what are great question Phil right so Phil ask the question what are the common pitfalls that people stumble into when designing the ecosystem so the truth is that as much as I mentioned there is the market design mechanism design token design and usually we start this way we start with a business plan who is what's the business plan what's the business

35. 14:29

    model who is in these economic who are the economic agents we want to care about and then we designed the incentives that's aligned to the revenue stream and business model then we talk about tokens one thing that people usually do is they do it the other way around I've got tokens and why do I need tokens I need tokens to fundraise I don't know what kind of business model I I have it doesn't matter because all I know is it's a hot market right now I need to fundraise and the investors are expecting tokens so from there they

36. 14:52

    start working backwards and that's not exactly wrong because sometimes that could work but the problem is you all these tokens that exist need to align with the reason why tokens exist tokens cannot exist because I want to fundraise that's not the reason for tokens to exist tokens exist for a long-term perspective it's about creating value in the long run to allow this ecosystem to be very robust to keep growing and if you're just creating a token for the

37. 15:17

    sake of creating token creating token for investors to come in and then they can dump it after that's absolutely the wrong way to create tokens super and anyone yes can I create an ecosystem without any tokens Can so he is asking can I create any ecosystem without any tokens very good question absolutely yes it's not in my interest to say yes but the truth is that yes there's so many ecosystems out there without any tokens atend of the day a token is just a means to an end it's just a tool a tool used to allow people

38. 15:48

    to collaborate and coordinate an ecosystem is getting people together to interact with each other you do not need a token to do that a token can help in a lot of different ways but it's not a necessary tool all right are we done okay I'm so sorry I'm done but you can still hear me later because I'm going to be here again thank you