Cryptoconomy: An international economy which uses a decentralized cryptocurrency as the medium of exchange.
As cryptocurrencies have begun to revolutionize the world’s economies, it has proven difficult to find a consensus on what the cryptoconomy exactly is and how works. because of this, virtfund has decided that it is important to provide a page where readers can come to understand our take on the matter.
According to Investopedia.com, an economy is defined as, “The large set of inter-related economic production and consumption activities which aid in determining how scarce resources are allocated. ” Now, determining how a new structure fits into an old-guard definition is almost always a difficult feat. This is surely what has lead to the confusion among people about how a cryptoconomy works and even whether or not acryptoconomy actually exists.
The Gross Domestic Product (GDP) of an economy is an indicator of substantial significance to the health of an economy. In fact, many economists consider an economy’s GDP to be equivalent to the size of the measured economy. Since GDP is an inherently economic indicator, being able to calculate the GDP of a cryptoconomy will prove its status and provide a framework for examining the events that effect it.
Briefly, let’s go over how GDP is calculated for all those unfamiliar with the topic. A simple formula is used: Consumption + Investment + Government Spending + (Exports – Imports). Consumption is the amount that private individuals spend on final goods (as opposed to those that will be used a part of another good) and services. Investment is the spending that businesses do to to buy the goods that will aid them in making goods and services. Government spending is, putting very simply, the amount that the government spends. Lastly, exports minus imports, or net exports, are the goods sold to other economies minus the goods bought from other economies. While this definition is very simplified, it still will do a good job in serving its purpose as a guide for the remainder of this post.
Now, in order to successfully calculate the GDP of a cryptoconomy, we will need to understand how each of the pieces of the GDP formula apply to it.
First off, consumption in a cryptoconomy is the same as it would be in any traditional economy, the amount that private individuals spend on final goods and services. For instance, whenever someone buys a pizza with Bitcoin, an automated trading bot with Dogecoin, or even drugs with Dashcoin, they are engaging in a transaction that would be considered consumption as it relates to the economy of each coin.
Next up, investment is the spending, with a specific cryptocurrency, that businesses who intend to sell products denominated in the same cryptocurrency engage in to buy the things that will aid them in making goods and services. For instance, a Bitcoin company that sells mining contracts denominated in BTC and also buys a website template with Bitcoin would be engaging in investment spending. as it relates to the Bitcoin economy Similarly, when a company that offers products denoted in Monacoin uses Monacoin to buy tools for manufacturing the products, the bough tools would be considered investment spending in the Monacoin economy.
Government spending is, perhaps unsurprisingly, the easiest to comprehend. Simply, since decentralized cryptocurrencies don’t have a government controlling them, government spending will always equal zero.
Lastly, and by far the most complicated, are exports and imports. Exports, in a cryptoconomy, are the goods and services produced by a company that used a cryptocurrency to pay for the expenses in creating the product, that are then sold to an individual or business that operates in primarily another currency. For instance, imagine a company that sells mining rigs in Vericoin and also pays the expenses related to creating the rigs, also, in Vericoin. This company sells to an individual who completes the vast majority of his transactions in euros, yet still pays for his mining rig in Vericoin. This would be an example of an export in the Vericoin cryptoconomy.
Lastly, a cryptoconomy import is a situation in which a good or service is produced by an entity that operates primarily in another currency and then sold to an entity that operates primarily in the currency of the cryptoonomy. For instance, if the mining rig company from the previous example were to buy a circuit board from a business that operates primarily in U.S. Dollars, and pays for it in U.S. Dollars, this transaction would be considered an import in the Vericoin cryptoconomy.
Unlike in a traditional economy, exports and imports are a substantial majority of every cryptoconomy due to the fact that no cryptoconomy has, as of yet, established a sufficiently “closed-loop economy,” or an economy that can sustain itself without the need to import substantially. This is due to the lack of business infrastructure in many cryptoconomy, among other factors. Because of this, it is especially important to the health of a cryptoconomy for it to have exports at least equal to its imports.
Exports are, basically, money flowing into the economy, while imports are money flowing out the economy. If imports are less than exports, money will drain from a cryptonomy. This means lower market cap for the currencies, less business opportunities, and a continuing contraction in the size of the potential GDP.
Obviously, the above condition is unsustainable; which is why Virtfund believes that the export-to-import ration is one of the most, if not the most important factor in determining the health of a cryptoconomy. The future of the various cryptocurrencies will depend, in large part, on how well they can convince the various market participants to act as exporters compared to those that act as importers in each cryptoconomy.