In a new speech this week, ethereum creator Vitalik Buterin gave a spotlight to the study of so-called ‘cryptoeconomics’, the union of cryptography and economics at the heart of public blockchain R&D.

At the ethereum developer conference EDCON 2017, held over two days in Paris, Buterin used his talk to provide a big picture overview why he considers the study of the subject core to his work on ethereum, the second-largest public blockchain by market capitalization.

Topics included how cryptographic puzzle pieces (such as proof-of-work, hashes and more complicated tools like zk-SNARKS) can be paired with forms of economic engineering including incentives and privileges.

While the subject may have seemed educational at first, the talk served to highlight the intellectual backdrop for some of ethereum’s more necessary (and contested) ideas for how to improve its protocol.

For example, Buterin noted that the field is likely to inform its highly-anticipated proof-of-stake protocol and possibly lead to the building safer oracle systems that feed ethereum smart contracts outside data.

Before diving in, however, Buterin began the talk with his own definition of the emerging concept.

He told the audience:

“Cryptoeconomics is about using a collection of cryptographic and economic building blocks in order to build systems that have some desirable informational security properties.”

The importance of punishment

Buterin went on to explore how he is using cryptoeconomics to analyze where blockchain-based systems can go wrong, often referring to bitcoin as a key example and reference point.

Though the main reason that ethereum is pursuing proof-of-stake is because it could prove to be a greener, fairer alternative to bitcoin’s proof-of-work consensus mechanism, Buterin went as far as to argue that proof-of-stake might also be a more secure, at least in some ways.

Proof-of-work, he argued, is vulnerable to something along the lines of a P + epsilon attack, a way that miners can fool the system.

“This is one of the reasons why people want to push over to proof-of-stake,” he said.

The comments come months after ethereum first revealed its plans to switch to a new consensus mechanism, and an outstanding question remains whether this experimental R&D can keep pace with user and developer expectations.

Despite the claims that proof-of-stake works better, it’s worth noting that proof-of-stake hasn’t been deployed on a large-scale network, and some technical experts still doubt that it will work.

Still, Buterin’s point was that cryptoeconomics can be the frame of mind for finding new solutions.

Together cryptography and economics can be used to goad actors to act the right way, he said. One way to do that is to punish actors who are doing wrong — to push them to act in a way that benefits everyone. Usually that means taking away their money.

“Notice that this is a deviation from Satoshi and the holy book,” he said.

Awaiting use cases

Buterin went on to explain how ethereum researchers are applying the subject to invent new properties that Casper, its planned proof-of-stake algorithm, needs.

Borrowing from traditional distributed systems theory, he calls one feature that it needs “auditable safety,” which is to be able to prove that one-third of the validators are faulty.

Once it proves that, the system can “kick them again and again,” as Buterin put it, referring to the negative incentives a protocol can establish.

In other words, the protocol can snatch up a ration of the security deposits that the misbehaving actors originally stored on the network.

The second property that it needs is “plausible liveness,” or confidence that the protocol won’t stall or come to a stop, he posited. In terms of ethereum, that means that the network needs to continue moving so that transactions and smart contracts can continue to go through.

Beyond that, there are other areas he highlighted for further research.

Ultimately, he ended his talk with a list of open technical problems, including censorship resistance and scalable validation, both of which could emerge as obstacles on its planned proof-of-stake rollout.

Image via Pete Rizzo for CoinDesk