"Getting" Mechanism Design

Blockchain is just the technology.

The real innovation is cryptoeconomics.

That is, economic systems that can align groups of people who don’t know or necessarily trust each other around common objectives and strategies through the use of crypto-tokens.

This is where the business model innovation is going to come from and it’s the most interesting part of the revolution.

Understanding cryptoeconomics isn’t easy, however, as it is interdisciplinary and the disciplines such as game theory, network theory, and mechanism design are, in and of themselves, quite robust.

Within the field of cryptoeconomics, there is the emerging specialty of Token Engineering, in which I am currently on a self-paced educational process.

Token engineering is where the programming of the token that supports the crypto economy is developed, tested, and deployed.

A mistake in the token, like a mistake in building a bridge, can be catastrophic.

One day, there will be PhD offerings in the field. For now, there’s an online course.

As part of the course, we were told to read a fairly academic paper, entitled Foundations of Cryptoeconomics, which distills the numerous components of the field into clear sections.

I am not going to lie. It wasn’t a simple read and it took me a lot of concentration and some frequent breaks to digest it all.

One “a-ha” moment came in the section of mechanism design.

I had heard and used the term before, but I didn’t fully understand it until this moment (shame on me).

It’s the practice of building/designing a mechanism in order to deliver a pre-determined output.

So, you want a token that will maximize the security of the network? You design it one way.

Want one that will maximize utility? Design it a different way.

Unlike game theory (as least as I recall from my college days), which tries to figure out how people will behave when faced with a given challenge or behavioral economics, which tries to figure out how to nudge people towards an outcome, mechanism design is like a pinball machine…. the mechanism is designed so that, always, eventually, the ball will fall towards the bottom and into the hole.