About token engineering and the nature of a decentralized marketplace using the example of Bitcoin | BTC-ECHO
Blockchain technology enables the creation of a network that can last without a central entity. Ideally, this is ensured by generally invariable rules that market participants agree to when they voluntarily join the network. These rules are anchored in computer code at the protocol level and compliance is enforced by the network.
This is in sharp contrast to traditional market behavior, where a breach of law can only be pursued by the lengthy and inefficient process of going to court. In addition, national borders are removed as the networks are accessible to everyone and independent of national jurisdictions.
Bitcoin is the best example of a decentralized network. There is no single party that has the Bitcoin protocol because it is run remotely by the community and is open to anyone – be it to participate in mining, to further develop the protocol, or to simply use it for transactions.
In the mining process, miners provide their hashing power to validate transactions and ensure the security of the network. The basic functionality and rules of Bitcoin have been firmly anchored in the code since the launch of the Bitcoin network in January 2009.
Economic incentive mechanisms in decentralized networks
Various technical, economic and game-theoretical mechanisms are used to enforce these market rules. On the one hand, market participants receive compensation for doing valuable work for the network. On the other hand, market participants can be financially punished if they misuse the network for their personal gain, do a poor job or try to play the network and thus the other participants (for example, through spamming).
All rules must be enforceable without the application of legislation by a juridical force, since the participation is usually anonymous and the network is operated or managed by any legally tangible entity. For example, a financial commitment may be deposited as a pledge before acting on the network, which in the case of the rules of contradictory behavior is retained by the network and redistributed.
For Miners to be involved in the continuation of the Bitcoin Blockchain, they must have an incentive to provide their costly energy and invest in expensive hardware. A predefined compensation per block ensures this. The miner who first successfully clears the next block receives this pre-defined compensation, which is made up of the transaction fees and the block subsidy, with the former fluctuating and the latter currently being 12.5 bitcoins. The block subsidy is halved every four years. As Miners also receive the transaction fees, it is ensured that Miners will have an incentive to provide their services to the network even after a significantly reduced block subsidy.
Bitcoin is designed so that there is no way to cheat. This is because consensus in the Bitcoin network is very simple compared to other marketplaces that need to consider a higher level of complexity for a globally consistent view. For a consensus education in the network Bitcoin needs only the proof that energy was spent – proof of work.
This consensus leads to the solution of the double-spending problem without central decision-makers: there is no way to spend more than once. Only those transactions are accepted by the network that meet the predefined rules and this excludes double-spending. Therefore, it is important to wait for the payee to confirm payment through the network as a payee to prevent fraud.
Inherent trust through predefined rules enforced automatically by code
In order for market participants to be confident that the rules will be enforced, they must be publicly available and invariably defined in the Code. That's what the term "trustless" means. Changes are only possible through previously determined control mechanisms, which basically require a clear majority of the network. The holders of the tokens have an interest in improving the network since their token corresponds to a share in the network. An increase in the value of the network should be reflected in the value of the token. Conversely, this also means that the network belongs to all participants, because they determine the further development and participate in the increase in value.
The Bitcoin code is visible to everyone and equipped with fixed rules. There have been few changes at the protocol level since the launch of Bitcoin. The few changes that existed could only be enforced because the majority of the entire network has agreed.
Building a network through initial block subsidy
For a marketplace to work and grow, it needs supply and demand. However, demand usually only arises when there is a sustainable supply. A focus on building the supply side is needed. Uber and other marketplace tech giants are therefore first investing in expanding the supply side in order to provide consumers with a stable supply.
In decentralized marketplaces, the issuance of tokens enables the construction of the supply side in the network. Even before consumers make use of the offer of the network, by distributing tokens to market participants, they can be compensated in such a way that an offer is created. This distribution of block subsidies in the form of tokens usually takes place at regular time intervals.
Only by mining one can receive the block subsidy in the bitcoin protocol and thus emit new bitcoins. In the first four years, 50 bitcoins per scraped block were awarded. These Bock subsidies provide an incentive for miners to use their energy and hardware to operate the Bitcoin protocol.
A token without linking to a real world asset has value only if it follows sound-money principles
Token engineering takes into account the principles of Sound Money Theory to create an economically sustainable and healthy token. Sound Money Theory is based on two principles:
1) Consideration of the interests of the participants and logical deduction of their behavior (Praxeology).
2) Enable a free market that maintains the best network and token.
The former has already been explained in the previous chapter "Economic Incentive Mechanisms in Decentralized Networks". In the second point above, the demand for the token serves as a proxy for the decision of the market participants, which network they choose. Demand is inherently defined by the benefit inherent in the token, which is determined by numerous factors. In order to estimate the demand meaningfully, it is necessary to consider the interests of the participants (point 1 above).
The benefits of a token
So what factors determine the usefulness of a token? The token allows to perform certain activities on the network and serves as access to the network. Other aspects that determine the benefit of the token are: censorship resistance (resistance to manipulation or abuse of the system), robustness (uptime), limited supply (limited inflation), network effects, competition, etc.
Cement resistance plays a major role in decentralized systems, as data integrity has top priority. The offer page of a token is predefined in the log – at least it should be the same with any well-designed token. Because the investors and users of the protocol must know what they are getting involved in. It is absolutely necessary to know if there are a limited number of tokens and when how many tokens will hit the market, as this has a significant impact on price performance (the bigger the offer, the lower the price if demand remains the same).
Bitcoin is currently the safest decentralized monetary system. In a bit more concrete terms, Bitcoin is the safest distributed database in the world, where only a certain type of data can be stored (Bitcoin transactions). The Bitcoin Token also serves as an access token to a certain storage contingent in this database (Blockspace). Here are network effects to bear: The more people use Bitcoin, the more versatile this blockspace is usable – namely for transactions with even more parties.
In addition, the monetary policy in the Bitcoin protocol is predetermined and virtually unchangeable. This gives the Bitcoin protocol a completely new kind of predictability and thus security for those who invest in Bitcoin. Specifically, not more than 21 million bitcoins can be mined. In addition, each newly generated bitcoin per block is halved per block. This corresponds to a drastic reduction of the newly earned bitcoins per time interval. By not allowing inflation and manipulation, Bitcoin is considered the hardest money currently available.
Only because of the excellent design of the Bitcoin Blockchain does it meet such a high demand that market participants have an incentive to participate in the mining and further development of the usage possibilities of Bitcoin (inter alia through Second Layer like Lightning).
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