Introduction:

Since the launch of the community in mid-January 2024, we have conducted some explorations online and offline, hoping to promote the continuous development of the research ecology in this field by connecting researchers in Ethereum economics. However, in the process of contacting different community partners, we seem to have repeatedly encountered some problems: many students who seem to be interested in "cryptoeconomics" research have a vague definition of it; they don't know the significance of data analysis on specific topics; they want to know which practical problems are worth studying; and how to find like-minded "research friends" to discuss and collaborate.

In fact, these are also the problems we have just encountered and are still exploring. But as the author of this article, Davide, mentioned, open code, data, and research ecosystems make broader contributions possible (and necessary), while in the research ecosystem of traditional fields, these multi-party participation has been isolated in the proprietary intellectual property or academic publishing pipeline owned by companies. We do not want the various issues mentioned above to become a threshold. Through this article, readers will have a clearer understanding of the above issues and find it easier to find their own research goals and carry out their work.

"Blockchain economics refers to the 'mechanisms, incentives, and macroeconomic policies' that coordinate 'value creation and distribution' in cryptoeconomic networks." Why do we want to be a community focused on Ethereum economics? In this article, Davide mentioned a concept called SEC ( Security, Equity, Cost-efficiency ), which is a commitment provided by the Ethereum system at the economic level. It is related to but different from the blockchain trilemma (security, decentralization, and scalability). The trilemma is related to the technical properties of the blockchain system, while SEC is related to the economic properties built on the blockchain. SEC has more constraints to consider (more restrictive) than the trilemma because it requires not only technological breakthroughs, but also the design of economic incentive mechanisms to ensure that the system is fair and cost-effective in practical applications. This means that when designing blockchain systems, broader economic and social factors must be considered, not just technical challenges.

As we dive into the rabbit hole of economic mechanism research, we find this work more and more challenging, but also more fun. This concise guide to Ethereum economics is not only for readers who are interested in cryptoeconomics, but also a guide for our community. Start small, share our work, and iterate. In the future, we will explore more ways to interact with community researchers and make progress together with the community :)

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How do you define blockchain economics? It generally refers to the “mechanisms, incentives, and macroeconomic policies” that coordinate “value creation and distribution” in cryptoeconomic networks. This is a new field: blockchains enable novel currency designs and open up a whole new class of markets. It’s also a hybrid field that combines economic design and software development. At the same time, it’s an evolving and dynamic field: full of pressing problems; rich open data for measurement and evaluation; and a system of composable markets that is updated with every hard fork or smart contract upgrade deployment.

This article aims to provide a practical guide for all those who want to learn more and contribute to research and development. The following article focuses on Ethereum, which is the largest ecosystem with the most advanced economic mechanisms. In this introduction, we first discuss our goals and clarify the importance of advancing blockchain economics research to realize the promise of the "Internet of Value"; describe the different subfields that have recently emerged in blockchain economics; and provide some resources for everyone to better participate in building better economic systems through open collaboration.

The significance of blockchain economics research

We can start by talking about the economic structure we hope to build and its core values. The "Internet of Value", or web3, is a system for "value transfer" on an Internet-native communication network that is much better than the current financial and payment system. Early successful experiments in blockchain technology, from Bitcoin to Ethereum and beyond, have shown that it is possible to build such a system. However, we are still in the early stages of this long game, and we need to continuously improve the system to ensure that we can achieve our promise: to build a better Internet. Specifically, what are these promises?

• Security: 51% attacks and other attacks on the blockchain are so costly that they are economically infeasible; users have a very low risk of having their assets stolen by malicious actors; smart contract applications are very robust.
• Fairness: Anyone can access the system, and the cost of censorship is so high that censorship is infeasible or cannot last for a long time (this is censorship resistance or fairness in access); service providers are rewarded only for the value they add to the network and cannot use their position to manipulate the market and extract additional value from users (i.e., distributive fairness).
• Cost-efficiency: Transaction costs are orders of magnitude lower than traditional payment systems; cost volatility is low and is only affected by externalities imposed on the network, i.e. costs rise when the network is more congested.

We call these three properties blockchain SEC (not to be confused with the US Securities and Exchange Commission!) Note that this is related to but different from the blockchain trilemma (achieving security, decentralization, and scalability simultaneously). The trilemma is about the technical properties of blockchain systems, while SEC is about the economic properties of building on top of blockchains. SEC is more restrictive than the trilemma, with two examples: if the blockchain is very decentralized (technically decentralized), then the cost of censoring transactions is high; but if the cost of censorship is too low (economically, if nodes are cheap to bribe/attack), censorship will still occur. If the blockchain is scalable (technically scalable), then transaction costs should be low; but if a group of service providers can collude to limit block space and artificially raise gas prices (economic incentive-driven scalability failure), then the system will not be cost-effective.

Translator's note: The reason why SEC is more restrictive than the trilemma is that it requires not only technological breakthroughs, but also the design of economic incentive mechanisms to ensure that the system is fair and cost-effective in practical applications. This means that when designing blockchain systems, broader economic and social factors must be considered, not just technical challenges.

Our goal is to build a system that can robustly maintain these properties. Blockchain technology allows us to encode rules, rewards, and penalties for users and service providers into a public, immutable protocol. Under such blockchain technology, SEC can be transformed into a fundamental characteristic of the blockchain economic system. Of course, achieving and maintaining such characteristics requires reasonable economic design. In order to successfully realize the Internet of Value and its mass adoption, an additional property is required: practicality. In this case, reasonable economic design is crucial for core applications such as crypto assets, stablecoins, and financial protocols.

How to advance this work?

Divide and conquer

Below is an overview of the most important subfields of blockchain economics. We can divide the economic structures that make permissionless blockchain stacks possible into three groups: (1) resource allocation and value (re)distribution mechanisms; (2) aggregate effects and market structures; and (3) economic applications in terms of user experience, such as stablecoins and lending products. Different areas require different expertise, ranging from economics to engineering to data analysis. We describe these areas in detail in the following sections.

Research and collaboration

We have only explored a small part of blockchain economics compared to its vast potential. It is important that research and development continue to advance in parallel, as economic mechanism design requires careful consideration and will only grow in complexity over time.

In terms of research, there are two areas of work:

• Fundamental research: mapping the design space of cryptoeconomic mechanisms, proving essential properties or impracticalities of emerging classes of relevant mechanisms, defining fundamental concepts and establishing connections between them.
• Applied Research/Research & Development: Define new mechanisms that solve practical problems of importance; study existing mechanisms to identify their strengths, weaknesses and explore potential improvements; design feasible implementations that take into account practical constraints; simulate and test the robustness of mechanisms; and analyze data collected in test and production environments to ensure that the designed mechanisms work as expected without errors or deviations.

Personally, I will focus mainly on the second area and collaborate with some academic researchers to advance the first area, especially when the basic research has practical relevance and can lead to real innovation. In R&D, most of the relevant problems are driven by roadmap priorities and challenges faced by real-world systems (such as Ethereum). Therefore, it is important to understand the development process, work on timely solutions, and remain flexible when priorities may change.

I am very excited about the unprecedented level of collaboration that open research, open data, and the permissionless nature of Ethereum are enabling: applied researchers, academics working on fundamental problems, core R&D teams, application/infrastructure teams in the ecosystem, and researchers in the community providing data analysis and other explorations.

Focus on practical issues

Many practical blockchain economics problems have started to emerge recently. Especially in Ethereum, the developed decentralized financial system and the rise of L2 have brought new economic challenges, such as MEV or resource pricing. We provide a list of examples of some foundational problems currently being studied, with some links for you to explore. In subsequent articles, we will provide more in-depth guides and further explore the latest progress in these fields.

(1) Resource allocation and value (re)distribution mechanisms

• Protocol distribution, destruction, and other provider incentives
• Validator rewards design document https://notes.ethereum.org/@vbuterin/serenity_design_rationale?type=view#Base-rewards
• Congestion pricing at L1
• The initial idea of EIP-1559
• https://ethresear.ch/t/first-and-second-price-auctions-and-improved-transaction-fee-markets/2410
• Economic Analysis of EIP-1559
• https://timroughgarden.org/papers/eip1559.pdf
• And the implementation of Ethereum
• https://github.com/ethereum/EIPs/blob/master/EIPS/eip-1559.md
• Blockspace Auction
• Influential Papers
• https://arxiv.org/pdf/1904.05234.pdf
• Ethereum Implementation
• https://docs.flashbots.net/
• Multi-resource pricing between L2 and other L1-L2 interactions
• The idea of multi-resource pricing
• https://ethresear.ch/t/multidimensional-eip-1559/11651
• Rollup Economics Framework
• https://barnabe.substack.com/p/understanding-rollup-economics-from
• MEV sources and other L1 application interactions
• Definition of cross-domain MEV
• https://arxiv.org/pdf/2112.01472.pdf

(2) Overall effect and market structure

• Sustainable and secure cryptocurrency monetary policy
• Original article about Ethereum issuance
• https://blog.ethereum.org/2016/07/27/inflation-transaction-fees-cryptocurrency-monetary-policy
• Circulation Supply Balance Model
• https://ethresear.ch/t/circulating-supply-equilibrium-for-ethereum-and-minimum-viable-issuance-during-the-proof-of-stake-era/10954
• Industry structure and dynamics of economic decentralization
• Builders Market Data
• https://www.relayscan.io/
• Market structure triggered by MEV, exploring MEV elasticity
• https://notes.ethereum.org/@RMFhKOrSSEWxmqjZMOT1Ag/rJb_cq8Co
• Attack and censorship resistant
• PoS Attack Summary Paper
• https://ieeexplore.ieee.org/stamp/stamp.jsp?arnumber=8653269
• The cost of censorship
• https://notes.ethereum.org/@vbuterin/pbs_censorship_resistance

(3) Economic applications in terms of user experience, such as stablecoins and lending products

• Decentralized Stablecoins
• RAI interest rate controller implementation
• https://medium.com/reflexer-labs/rai-i-term-tuning-update-a6a8de72f86
• LUSD lending mechanism implementation
• https://docs.liquity.org/faq/general
• Stablecoin Theoretical Framework
• https://arxiv.org/abs/2006.12388
• Safe and efficient lending and exchange
• AAVE Security Module Implementation
• https://docs.aave.com/aavenomics/safety-module
• Uniswap v3 Articles
• https://uniswap.org/blog/uniswap-v3
• Liquidity Collateralized Derivatives
• Staking Pool Introduction
• https://www.paradigm.xyz/2021/04/on-staking-pools-and-staking-derivatives
• Security Risk and Collateralized Derivatives Paper
• https://arxiv.org/abs/2006.11156

How to contribute?

The beauty of a permissionless and open system like Ethereum is that it enables broad contribution. Almost anyone interested in solving these problems can access the relevant literature or data and contribute based on their expertise. Broad contribution is not only a possibility, but a necessity to ensure that we build a robust and inclusive economic structure, an open infinite garden that resists the vulnerabilities and distortions of closed, permissioned gardens — as is the case with most traditional platforms.

There is no right or wrong way to contribute. But below are some suggestions and examples of what seems to work well.

Action Guide for Newcomers

• Choose a field in which you already have some expertise or can quickly pick up based on your background;
• Understand the state of technology/research. What are the most important problems that need to be solved? For basic research, the focus is on increasing understanding; for applied research, the focus is on making a real impact and promoting development. If you are just getting started, here are some resources/ideas: (1) Explore the ethresear.ch forum; (2) Pick some special research conferences to attend or volunteer (such as SBC, CCE, FC-DeFi); (3) Follow researchers on social media, they often share work progress and summaries;
• Start small, keep sharing your work, and keep iterating. Especially when you are a beginner on a topic, it is more effective to start from the perspective of solving a problem on which you can make concrete progress quickly. Choose the type of contribution that suits you, and share your results early to collect feedback and understand which directions are more important and worth further research.

job type

Listed below are some examples of the types of work that are useful for R&D and basic research. The open code, data, and research ecosystem on Ethereum enables different types of contributions that are traditionally isolated in proprietary intellectual property owned by companies or in academic publishing pipelines.

• Data analysis. This type of work can help with protocol mechanism design before a system upgrade, and can be used to evaluate actual effects and behaviors after the upgrade, or to understand system parameter configurations and their impact. Examples: winning results of the merged data challenge, gas analysis by Barnabe, and elasticity estimates of transaction demand by Vitalik.
• Simulations. Simulations are a critical step in developing new economic mechanisms and deciding on parameter updates. While testnets and other types of testing ensure that they are implemented effectively, simulations help assess the overall economic effects. They can be used to show that a mechanism will work as expected under "normal conditions" or to stress-test a mechanism under extreme circumstances. Example: EIP-1559 simulation.
• Research ideas. Sharing ideas early on to illustrate a problem or propose a partial solution has proven to be very effective. Especially when dealing with larger problems or mechanisms that require some subcomponents, early sharing helps to gather feedback from the wider community and guide progress towards a complete solution. Example: Vitalik's post on Multidimensional EIP-1559.
• Papers. This is a very traditional and preferred type of basic research. Longer length allows contributors to describe their work in detail and provide context in the literature. Since blockchain economics is a new field, contributions that define new mechanisms, establish frameworks, or provide analysis are often very useful. Example: DeFi SoK paper.
• Peer review. It is effective to have an article peer reviewed and published on the Ethereum Research Forum or other forums (such as the Smart Contract Research Forum). Especially in the current situation where the pace of research is very fast, influential work is often published online and widely circulated without sufficient review (for example, Terra's stability paper). Therefore, peer review and public discussion are particularly important.

Guidance and support provided

The Ethereum Foundation has several programs dedicated to supporting research and providing guidance on some of the most important issues facing practical applications. These include:

• Annual Academic Grants Round
• Thematic funding programs for different types of ecosystem projects and research, such as Layer 2 Community Grants 2022
• Ongoing Ethereum Protocol Fellowship (EPF)

The above link contains information on how to apply and get support, as well as ways to find some research wish lists and ideas: What research topics and types of work are most needed at the moment? You can also look out for funding for specific topics (such as the Layer 2 funding mentioned above) and submit RFPs on the Ethereum Ecosystem Support Program (ESP) page. The Ethereum Foundation also maintains a list of grants provided by other organizations in the ecosystem. Last but not least, my research group, the Robust Incentives Group (RIG) at the Ethereum Foundation, we will continue to update a list of open problems (ROP) on Ethereum economics.

You can also contact relevant research groups or individual researchers to further explore, discuss, and collaborate on research work you are already doing or planning. Different groups maintain open communication channels with the wider research community. Ethereum researchers are usually active on the Eth R&D Discord server and Twitter, and you can always find us at some key offline research conferences.