27 July 2020
Episode 17: Blockchain Economics: Part 1 — Basics
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 most of 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.