Blockchain Economics: Part 1 - Basics
Blockchain economics - what, why, and how. Block rewards, incentives, transaction fees, cryptocurrency supply, and demand.
Bitcoin was created as an alternate financial system after the subprime crisis of 2008. Banks, having too much control over people’s money, failed as a result of the crisis, and a lot of people lost their money. Bitcoin was created as a financial system where no single party had full control.
When a new financial system is created, there are a few things to make sure of:
- Having a medium of exchange i.e. currency.
- Having enough circulation of the currency to balance its supply and demand.
- A mechanism for people to own the currency.
And when the system is decentralized (like Bitcoin), then there is a need to also incentivize the people participating in the decentralization process i.e. hosting the nodes and helping verify the ledger(s).
Bitcoin answered all these questions:
- Block rewards were created to mint new coins and put them in circulation.
- The transaction fee (along with block rewards) was introduced to incentivize the node hosts.
- The total supply was capped so that the supply-demand was balanced.
- The halving of block rewards happens to manage the circulation of new coins.
All these concepts together comprise the overarching topic of blockchain economics.