It doesn’t take long before someone new to cryptocurrencies discovers some similarities, and a few differences, with real-world economics. In fact, at the most basic level, there is no difference at all. All currency values are directly tied to the law of supply and demand, for example. Beyond that, there are some ways that cryptocurrencies act differently than real-world currency.
In the U.S., if the Fed doesn’t think there is enough cash floating around, they can print more. What happens when the Fed prints more money? The value of dollars already in circulation goes down. That can’t happen with bitcoin.
Bitcoin is programmed to max out at 21 million. Once 21 million bitcoin have entered circulation, there will never be any more created. That scarcity ensures that bitcoin will maintain its value. In fact, it’s likely that bitcoin will continue to increase in value as more bitcoin are created because it means that more people are adopting it as currency, more people are holding it, and more people are using it. As more bitcoin is produced, the more difficult and expensive it will be to create new bitcoin.
Cryptosocial Communities Could Become Financial Markets Unto Themselves
Cryptosocial communities are like real-world markets. Where people gather to engage in commercial activities, there will be a supply and demand curve based on the number of people interacting with each other in the market, the value and type of goods being sold at the market, and whether consumers at the market are interested in those goods.
For as long as civilizations have existed, people have gathered in social circles to buy, sell, and trade. Early traders may have exchanged donkeys for wheat, or swords for hand tools. Markets allowed people to gather in one central place to conduct their trade activities, financial affairs, and socialize in one location. Cryptosocial communities are not yet that advanced, but blockchain developers are laying the groundwork right now.
It is important for blockchain developers to consider how cryptosocial economies grow. One way to do that is to study the economic systems of the real world.
How did the U.S. rise from being a colony of a superpower in the 18th century to being the largest superpower in the world in the 20th? There were forces, both internal and external, that influenced that rise and which simultaneously influenced the decline of previous superpowers. While Steemit, Minds, and Voice aren’t necessarily aiming to become superpowers, they are aiming to create economies. Therefore, a study of economics is prudent.
9 Elements of a Strong Crypto Economy
I do not claim this list is exhaustive, but here are 9 elements of what I’d consider a strong cryptoeconomy.
- Behavior incentivization – In society, laws create a fair playing field for all citizens. It’s just as important to incentivize good behavior as it is to discourage bad behavior. That’s why we give “keys of the city” to certain people or grants and awards for good citizenship and lifetime contributions. We value those who add value to the community. Cryptosocial platforms must likewise incentivize good behavior through a rewards system that encourages value creation to the community.
- Cryptocurrency protection – An economy is only as strong as its currency. Cryptosocial platforms are attempting to build economic and social communities in a way that’s never been done before. To be desirable, any rewards offered to cryptosocial citizens must have value. That could be monetary value, but it doesn’t need to be. A platform’s cryptocurrency could have utilitarian purposes—buying experience-enhancing items on the platform, or other merchandise, boosting posts or advertising, tipping other users, and more. If the coin or token holds value, people will work hard to earn it and the community will grow stronger. On the other hand, if a cryptocurrency has no value, people will not stick around to form a community around it.
- Currency demand – Whether coin or token, currency demand goes hand in hand with protecting the value of the cryptocurrency. If no one wants it, no one will respect the rewards system and people will leave the platform. Or worse, they’ll cash out and suck the value from the economy.
- Supply control – Every economy has two sides: A supply-side and a demand-side. Just as it’s important to create demand, it’s also important to control supply. How users are rewarded matters, and how much they are rewarded matters. Dole out too many tokens too soon and the platform will suffer from an oversupply of cryptocurrency, which will devalue the economy. If the rewards are too small, users will be disheartened and go elsewhere. Focusing solely on supply or demand is a terrible way to build an economy.
- Scarcity – An unlimited supply of any currency is good way to devalue it. Take U.S. dollar, for instance. Every time the Fed prints money, the dollars in circulation lose value. Bitcoin has built-in scarcity. There will only ever be 21 million bitcoin created. That ensures that those already in circulation hold their value. It’s imperative that cryptosocial platforms create scarcity. How that happens is not as important as the necessity of it happening.
- Personal, platform, and cryptocurrency security – This goes without saying, but a platform that is easily hacked will lose participants. The cryptocurrency will not hold value, and it will likely lose value.
- Networking – The main reason people join social media platforms is for the networking. Too much focus on the rewards system to the detriment of tools that encourage networking and community-building will simply lead to a dog-eat-dog bumrush for more gold. Platforms need to focus on the community aspect of social media without ignoring the clear benefits of the cryptoeconomy as a whole.
- Public good protection – Trouble makers need to go. Any platform that tolerates copyright thieves, child pornographers, and other ne’er-do-wells is asking for trouble—legal and social. The legal troubles could land founders and managers in jail or facing hefty fines. But the public relations trouble could kill the entire economy. Literally. In the real world, law enforcement serves this function. Cryptosocial communities are left to the devices of human authority and code.
- Community expectations management – People are harsh critics. One man’s paradise is another man’s hell. Cryptosocial platform builders need to keep in mind that everyone’s tastes are different. Game of Thrones might be entertaining, but it’s not everyone’s cup of tea. Some people prefer Little House on the Prairie and Leave It to Beaver. Not only that, but cryptosocial platforms need to give users control over the content they publish as well as the content they view. It’s fine to offer a platform that maximizes freedom of expression, but in doing so you’ll limit your market and your economy because some people don’t want to gawk at breasts all day or read endless political rants. If you’re going to allow the most risque content, consider giving it a NSFW rating or allow users the ability to block the content they don’t want to see. This is practical common sense, but I’m surprised at how many platforms don’t take it to heart.
This is merely a start. It’s intended for discussion, not a list of bylaws. That said, in cryptosocial communities, the code is the law. It establishes the rules and enforces them. Put some thought into the kind of community you want to build and write the code to that end.
DISCLAIMER
I am not a financial advisor, nor do I give financial advice. The above information should not be considered financial advice but is for informational purposes only. Neither I nor Cryptowriter are responsible for financial losses incurred as a result of acting on this information. Please consult a financial advisor before making any financial decisions.
This post is published for Cryptowriter in association with Voice.
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