Crypto Economics Crash Course

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

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.
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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 Frontier for Crypto Economics
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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
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*Why Crypto will Kill Cash: goo.gl/9xUMrj

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).
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Crypto Isn’t Tulips
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● 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

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
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*Blockchain Simply Explained: youtu.be/SSo_EIwHSd4
**Blockchain History: goo.gl/3SP4Qz

Revolutionize The World
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● 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.

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, ...
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*Product Life Cycle (00:22:03): youtu.be/G29eZIeWljc
**Stiglitz Says “Outlaw Bitcoin”: goo.gl/mn4j5a

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.*
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*Cocaine Traces on US Bills: goo.gl/LMF1LQ

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.*
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*Superdollars: goo.gl/jGTcEd

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
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*Coinmarketcap (View All): goo.gl/tF6CuS

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.
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*ERC20 Tokens: goo.gl/jSxvbZ

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.*
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*Differing Definitions & Regulations: goo.gl/aqMmRo

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
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*Crypto Wallets: goo.gl/d3LY8N

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.
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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.
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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.
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*New Models of Utility Tokens: goo.gl/V2K5eg

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.*
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*Blockchair.Whitepapers: goo.gl/ZGA782

22

LUCIANO@EMPERITAS.COM
@ElemenTactical
Lucianopesci
t.me/emperitas
Let’s Talk Crypto Econ
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27Tokenomics ≠ Crypto Economics

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
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*Tokenomics 101: What’s In a Token?: goo.gl/nt9xka

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.
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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.**
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*Agile Qualitative Research: goo.gl/Lydo6c
**Step Up Survey Research: goo.gl/rY6APv

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.
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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.**
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*Net Promoter Score (00:51:54): youtu.be/SirK0SSBeZg
**Diminishing Returns (00:27:17): youtu.be/G29eZIeWljc

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.
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*Data-Driven Customer Profiles: goo.gl/Z7jjNV
**Pareto Principle (00:04:16): youtu.be/pyNrxUB-tBc

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.
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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.
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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.
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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.
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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)
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@ElemenTactical
Lucianopesci
t.me/emperitas
41

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45Next Frontier for Crypto Economics

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.”
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*Lean Customer Discovery Research: goo.gl/1ycitk

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.
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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?
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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.
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*Interpreting Data Like a Pro: goo.gl/1oCTUj
**Identifying Personas with Agile: goo.gl/qSuYVr

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.
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*Think Like An Economist (00:24:42): youtu.be/G29eZIeWljc

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.
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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.*
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*Cryptocurrencies’ Biggest Weakness: goo.gl/oR2TdR

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.
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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.
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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.
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What We Covered in this Crash Course...
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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.
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*Why Crypto Will Kill Cash (and governments too): goo.gl/YLSz95

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.
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*World-Shaking Power of Cryptocurrency: goo.gl/YLSz95

@ElemenTactical
Lucianopesci
t.me/emperitas
61

Crypto Economics Crash Course

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