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Crypto Economics Crash Course

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Dawn of the Data Age Lecture Series
Interpreting Data Like a Pro

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Hi. I’m Luciano Pesci, PhD…
Founder & CEO, EMPERITAS
● Team of economists & data scientists delivering crypto economic int...

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Crypto Econ Crash Course Outline
● Part 1: An Intro to Crypto
● Part 2: Tokenomics isn’t Crypto Economics
● Part 3: Next F...

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Crypto Economics Crash Course

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This crypto economics crash course is meant to take someone with little or no understanding of crypto, and turn them into an armchair expert in the social and technological impact of cryptocurrencies and their blockchain based substitutes.

These slides cover all three parts of the crash course:

[Part 1] - Intro to Crypto (Slides 1-23)
[Part 2] - Tokenomics Isn't Crypto Economics (Slides 24-41)
[Part 3] - Next Frontier for Crypto Economics (Slides 42-61)

Watch the crash course videos here: https://goo.gl/YTmW2g

This crypto economics crash course is meant to take someone with little or no understanding of crypto, and turn them into an armchair expert in the social and technological impact of cryptocurrencies and their blockchain based substitutes.

These slides cover all three parts of the crash course:

[Part 1] - Intro to Crypto (Slides 1-23)
[Part 2] - Tokenomics Isn't Crypto Economics (Slides 24-41)
[Part 3] - Next Frontier for Crypto Economics (Slides 42-61)

Watch the crash course videos here: https://goo.gl/YTmW2g

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Crypto Economics Crash Course

  1. 1. Dawn of the Data Age Lecture Series Interpreting Data Like a Pro
  2. 2. Hi. I’m Luciano Pesci, PhD… Founder & CEO, EMPERITAS ● Team of economists & data scientists delivering crypto economic intelligence. Founder & Director, Utah Community Research Group, Univ. of Utah ● Teach microeconomics, data science, applied research, & American economic history. 2
  3. 3. Crypto Econ Crash Course Outline ● Part 1: An Intro to Crypto ● Part 2: Tokenomics isn’t Crypto Economics ● Part 3: Next Frontier for Crypto Economics 3
  4. 4. 4An Intro to Crypto
  5. 5. What is Crypto?* ● Formal definition: ○ Crypto is an ubiquitous term for cryptocurrencies & their related blockchain based substitutes. ● It’s mostly money (for now): ○ Unit of measure ○ Medium of exchange ○ Store of wealth 5 *Why Crypto will Kill Cash: goo.gl/9xUMrj
  6. 6. It’s Idealistic ● Built on notions of individual sovereignty in all things, especially the control of wealth. ● Improves the world through transparency & voluntary democratic participation. ○ Breaking down national borders and allowing for new exchange (commodities, people & ideas). 6
  7. 7. Crypto Isn’t Tulips 7 ● Performance of crypto in 2017 has been compared to the Dutch Tulip Mania.* ○ Tulips had no meaningful impact on Dutch economy. ○ Tulips are $58M a year industry in US.** ● Crypto is different because the underlying blockchain technology has huge utility. ○ Mostly around the nature of trust in human society. *When 10 Tulips Cost More Than a House: goo.gl/v54wi3 **US Tulip Sales 2002-2015: goo.gl/XWMa15
  8. 8. What is Blockchain?* ● Idea born in 1991 for document control.** ○ Same year Terminator 2 was released. ○ A decentralized database (ledger). ● Credit usually given to Bitcoin. Most blockchains are characterized by: ○ Block, hash, nodes & consensus 8 *Blockchain Simply Explained: youtu.be/SSo_EIwHSd4 **Blockchain History: goo.gl/3SP4Qz
  9. 9. Revolutionize The World 9 ● The power of blockchain is that it fundamentally changes the nature of trust. ○ This is why its earliest viable use was as money. ● Decentralized systems are more flexible & adaptive than centralized systems. ○ Both are dependent on perfect information, but blockchain moves us closer to that goal.
  10. 10. Haters Gonna Hate ● Blockchain & crypto are early in their individual product life cycles.* ○ This is where j-curve growth happens on the way to broad market adoption. ● Some economists are calling for it to be regulated out of existence.** ○ Silk Road, Terrorism, ICO Fraud, ... 10 *Product Life Cycle (00:22:03): youtu.be/G29eZIeWljc **Stiglitz Says “Outlaw Bitcoin”: goo.gl/mn4j5a
  11. 11. Equal Comparisons? ● A zero tolerance standard for other products used in illicit or black markets would make a large number of verticals vanish overnight. ● FIAT (government issued paper money) would have to be banned since 90% of USD bills contain cocaine residue.* 11 *Cocaine Traces on US Bills: goo.gl/LMF1LQ
  12. 12. But It’s Hackable!! ● The ability to get hacked doesn’t justify banning technology with net positive benefits. ● FIAT is constantly (hacked) counterfeited. ○ $200M (~1.6%) counterfeit USD is in circulation. ○ Superdollars are a prized export of North Korea.* 12 *Superdollars: goo.gl/jGTcEd
  13. 13. Generation Zero Crypto ● Cryptos created before 2016 are effectively generation zero. These were mostly money. ○ Genetics type links between some (forks). ○ They inspired the next generation. ● Top 5 cryptos by market capitalization:* ○ BTC, ETH, XRP, BTH & EOS ○ Makeup 63% of ~$300B crypto market 13 *Coinmarketcap (View All): goo.gl/tF6CuS
  14. 14. Forks & Exchanges ● Forks - crypto built on an existing blockchain. ○ Litecoins “soft fork” (backwards compatible). ○ ERC20 protocol has hundreds of tokens using it.* ● Exchanges - places to buy & sell tokens. ○ Similar to financial markets, but can be auctions. ■ Differ from direct or brokered trades. 14 *ERC20 Tokens: goo.gl/jSxvbZ
  15. 15. Tokens Types ● Rapidly growing number of ways to categorize blockchain-based cryptos: ○ Securities token ○ Utility token (including equity tokens) ○ Either can be “store-of-value” token ● Federal definitions of what crypto is vary & contribute to current legal ambiguity.* 15 *Differing Definitions & Regulations: goo.gl/aqMmRo
  16. 16. Wallets* ● A wallet lets you control your crypto tokens. ○ Really just comes down to access of private key. ● Since changes to the blockchain are permanent, security is very important: ○ Hot Wallet - connected to the internet ○ Cold Wallet - not connected to the internet 16 *Crypto Wallets: goo.gl/d3LY8N
  17. 17. Smart Contracts ● Functions like a legal contact but isn’t in a human language, it’s coded (programmed). ● Highly transparent and have potential to eliminate a huge number of legal disputes. ○ You just have to be able to read the code to consent, then the rest happens no matter what. 17
  18. 18. Following FED Thinking ● Crypto’s monetary mentality is lessening with the next generation of tokens. ○ But it’s still pretty bad right now. ● Some are copying FED behavior. ○ An “airdrop” is just a private sector attempt at stimulus economics. 18
  19. 19. Generation One = Utility ● ICO’s & entrants from 2016-2018 represent an inflection point with gen one cryptos. ○ Some are money, others have a work function.* ● Founders are pushing crypto’s legal definitions by embracing “utility.” ○ Global participation is fueling innovation. 19 *New Models of Utility Tokens: goo.gl/V2K5eg
  20. 20. A Whitepaper Manifesto ● Following Bitcoin’s example, virtually every crypto issues a whitepaper. ○ Outlines the governance, tokenomics, marketing strategy, tech specs, etc. ● This ecosystem is being databased. ○ ~2,000 whitepapers and climbing.* 20 *Blockchair.Whitepapers: goo.gl/ZGA782
  21. 21. 21Coming Up Next...
  22. 22. Crypto Econ Crash Course Outline ● Part 1: An Intro to Crypto ● Part 2: Tokenomics isn’t Crypto Economics ● Part 3: Next Frontier for Crypto Economics 22
  23. 23. LUCIANO@EMPERITAS.COM @ElemenTactical Lucianopesci t.me/emperitas Let’s Talk Crypto Econ 23
  24. 24. Dawn of the Data Age Lecture Series Interpreting Data Like a Pro
  25. 25. Hi. I’m Luciano Pesci, PhD… Founder & CEO, EMPERITAS ● Team of economists & data scientists delivering crypto economic intelligence. Founder & Director, Utah Community Research Group, Univ. of Utah ● Teach microeconomics, data science, applied research, & American economic history. 25
  26. 26. Crypto Econ Crash Course Outline ● Part 1: An Intro to Crypto ● Part 2: Tokenomics isn’t Crypto Economics ● Part 3: Next Frontier for Crypto Economics 26
  27. 27. 27Tokenomics ≠ Crypto Economics
  28. 28. Anatomy of a Crypto Token?* ● Governance & Market ○ Legal structure & treasury rules ○ Consensus & regulation ● Economic Model ○ Incentives & network effects ○ Competitors ● Humans & Machines ○ Token holders, validators, ambassadors, ... ○ Technology stack 28 *Tokenomics 101: What’s In a Token?: goo.gl/nt9xka
  29. 29. Governance ● This covers all the rules that guide the token and any company that might exist behind it. ○ Also includes treasury & allocation details. ○ Details about consensus are important to examine. ● If the token acts as a utility token then this also includes the full business model. 29
  30. 30. A Market ● Cryptos are still a product which means they have to find their “product-market fit.” ○ This proved key to Silicon Valley startup success. ● Best done with agile qualitative research.* ○ Certain problems (like pricing) need quantitative research but this can also be done agilely.** 30 *Agile Qualitative Research: goo.gl/Lydo6c **Step Up Survey Research: goo.gl/rY6APv
  31. 31. Economic Model - Incentives ● The main feature of most new crypto whitepapers is their Tokenomics. ○ These are often vague & more closely resemble accounting summaries. ● A explanation of incentive behavior for the token should be crystal clear. ○ Must look beyond marco supply & price. 31
  32. 32. Economic Model - Network Effects ● Another key part of any crypto’s economic model is its token adoption strategy. ○ “Word of mouth” network effects can be proxied by NPS.* ● Network effects don’t last forever because of the law of diminishing returns. ○ They set in as a crypto traverses its product life cycle.** 32 *Net Promoter Score (00:51:54): youtu.be/SirK0SSBeZg **Diminishing Returns (00:27:17): youtu.be/G29eZIeWljc
  33. 33. Crypto’s Diverse Humans ● Focus should be on individuals who are going to actually use the crypto token.* ○ 1 in 5 holders brings 80% of total value.** ● Cryptos also depend to differing degrees on other groups of humans: ○ Validators, Ambassadors, Founders, Advisors, ... ○ Spread across many national borders. 33 *Data-Driven Customer Profiles: goo.gl/Z7jjNV **Pareto Principle (00:04:16): youtu.be/pyNrxUB-tBc
  34. 34. Crypto’s Technology Stack ● Next gen crypto heavily depends on tech: ○ App/platform ○ Financial & digital marketing tools ○ Competitive & market intelligence ○ Customer experience feedback systems ● Cryptos are also being built on more complex technology stacks, and the data is amazing. 34
  35. 35. Tokenomics ● The first attempt to explain these complex cryptocurrency systems was Tokenomics. ○ Also known as “Token Economics.” ● Relies almost exclusively on monetary & financial market economic theory. 35
  36. 36. A Monetary Mindset ● Most gen zero & gen one cryptos are trying to be a competitor for FIAT money. ● This has influenced what’s considered to be the current field of Tokenomics. ○ Equation of exchange is usually the extent of econ in crypto whitepapers. 36
  37. 37. A Financial Focus ● Crypto has been compared to securities. ○ This is also where most of the regulatory action is happening (for the moment). ● This is because people want to hold it, which creates investment incentives. ○ Only needs a net present value greater than FIAT for a rational flight to crypto. 37
  38. 38. Tokenomics Isn’t Enough ● Tokenomics doesn’t explain the “why” behind a crypto and is being eclipsed by crypto economics: “Crypto economics is a way of doing incentivized mechanism design to enable many actors to contribute their resources to validating transactions and securing that network...” -Joe Lubin, Ethereum Co-Founder (at SXSW) 38
  39. 39. 39Coming Up Next...
  40. 40. Crypto Econ Crash Course Outline ● Part 1: An Intro to Crypto ● Part 2: Tokenomics isn’t Crypto Economics ● Part 3: Next Frontier for Crypto Economics 40
  41. 41. LUCIANO@EMPERITAS.COM @ElemenTactical Lucianopesci t.me/emperitas Let’s Talk Crypto Econ 41
  42. 42. Dawn of the Data Age Lecture Series Interpreting Data Like a Pro
  43. 43. Hi. I’m Luciano Pesci, PhD… Founder & CEO, EMPERITAS ● Team of economists & data scientists delivering crypto economic intelligence. Founder & Director, Utah Community Research Group, Univ. of Utah ● Teach microeconomics, data science, applied research, & American economic history. 43
  44. 44. Crypto Econ Crash Course Outline ● Part 1: An Intro to Crypto ● Part 2: Tokenomics isn’t Crypto Economics ● Part 3: Next Frontier for Crypto Economics 44
  45. 45. 45Next Frontier for Crypto Economics
  46. 46. Product-Market Fit Research ● Too many cryptos are being built on untested & underdeveloped ideas. ○ No matter how passionate you are, you aren’t the entire market. You need to talk to other people. ● There’s a specific research method pioneered by Silicon Valley for doing this.* ○ “Get out of the building and talk to customers.” 46 *Lean Customer Discovery Research: goo.gl/1ycitk
  47. 47. Market Intelligence ● Your crypto is part of the global market which means you’re subject to its will. ○ It can change dramatically in an instant. ● Macroeconomic forecasts should be included in your crypto economic model. ○ Regulation “shocks” should also be tested. 47
  48. 48. Competitive Intelligence ● You don’t just compete with other cryptos. ○ If you’re a monetary crypto you’re facing down an 800 lb gorilla known as Government. ● FIAT is modelled extensively by economists. ○ If you’re not doing the same for your token, how can you possibly compete with them? 48
  49. 49. Agents (aka Personas) ● Assessing crypto on averages alone is bad. ○ Look at measures of shape, center & spread.* ○ Track and compare all of these over time. ● Divide your humans into 5 subgroups each represented by an archetypal agent.** ○ The Pareto group should be one of these. ○ These add incredible precision to simulations. 49 *Interpreting Data Like a Pro: goo.gl/1oCTUj **Identifying Personas with Agile: goo.gl/qSuYVr
  50. 50. Cost Analysis ● Costs are within your control, regardless of your crypto’s life cycle position.* ○ The more data you collect the more you control. ● This is especially important for the utility tokens that also have to run a business. 50 *Think Like An Economist (00:24:42): youtu.be/G29eZIeWljc
  51. 51. Supply & Demand ● First place you should use microeconomics is to model overall supply & demand: ○ Supply requires cost details & production (technical ops) data. ○ Demand requires holder preferences & price sensitivity data. 51
  52. 52. General Equilibrium ● Everything in the market has a natural gravitation toward specific outcomes. ○ Price is guided by this “invisible hand.” ● If you’re collecting the right data over time you can forecast all of these marco metrics. ○ This will help you limit speculation & velocity.* 52 *Cryptocurrencies’ Biggest Weakness: goo.gl/oR2TdR
  53. 53. Best Response & Game Theory ● With data about your crypto & competitors you hit the next level of crypto economics. ○ This is the world of game theory. ● You can know a best response to shocks or market changes before they happen. ○ Creates stability in your predictions of value. 53
  54. 54. Simulation ● Basically the matrix but for crypto tokens. ○ Digital world represented by equations that dictate everything, but account for randomness & shocks. ● Using rules & models built with real data you test millions of iterations about your crypto. ○ Shows convergence to equilibrium & limits of token. 54
  55. 55. Crypto’s Unified Theory ● Crypto economics provides a complete unified theory (unlike Tokenomics). ○ It’s better for analyzing why tokens have value. ● It sees tokens as a mini crypto economy. ○ It’s the key to 2nd gen crypto success. 55
  56. 56. 56Bringing It All Home
  57. 57. What We Covered in this Crash Course... ● Part 1: An Intro to Crypto ● Part 2: Tokenomics isn’t Crypto Economics ● Part 3: Next Frontier for Crypto Economics 57
  58. 58. 58How To Keep Learning...
  59. 59. You Should Read - [Why Crypto Will Kill Cash]* Authored by Luciano Pesci & the Emperitas crew (researchers). Cliff Notes: Crypto fulfills all of the formal requirements of money in economics: it’s a store of wealth, a unit of measure, and a medium of exchange. But it also does a lot of things cash can’t (like produce amazing data). The efficiency gains of this additional value (utility) is driving a revolutionary monetary moment. 59 *Why Crypto Will Kill Cash (and governments too): goo.gl/YLSz95
  60. 60. You Should Listen - [World-Shaking Crypto Power]* MarketScale Podcast featuring Luciano Pesci. Cliff Notes: Crypto took the world by storm in 2017 and early adopters (rightfully) profited from their foresight. Now a new generation of crypto tech has emerged and promises to move blockchain beyond monetary competitors. In the process it will change the nature of trust & exchange, creating a better future. 60 *World-Shaking Power of Cryptocurrency: goo.gl/YLSz95
  61. 61. LUCIANO@EMPERITAS.COM @ElemenTactical Lucianopesci t.me/emperitas Let’s Talk Crypto Econ 61

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