Cryptocurrencies: It’s all about incentive

One of the major selling points of cryptocurrencies is that everything is decentralized and trust no longer lies in single a third party. However, the trust didn’t simply dissipate, it got distributed to participants of the network. In my opinion, the incentive structure built into cryptoeconomics is one of its most overlooked benefits. The fundamental idea can be summarized as follows: no one wants to lose money, and everyone wants to maximize the profit they receive for the work that they do.

Below are a few different examples of the role that financial incentive plays in various aspects of cryptoeconomics.

Bitcoin

BIP148

Schelling Coins

Tokens

To answer this question, take FileCoin as an example. FileCoin, a decentralized storage network built on top of IPFS, is going to have an ICO in the coming weeks. To achieve a truly distributed data store, their network will require many nodes spanning the whole globe to sign up as storage providers. Those individuals who will configure and offer their hardware to host files will be rewarded with FileCoins. Since it’s going to be possible to trade FileCoins for BTC/ETH (and in turn USD), why not pay these individuals in BTC directly? A greater network effect and influx of new sign ups is more likely to take place if early adopters are incentivized by a new form of currency rather than a well established one due to the greater potential financial upside. Similar to how stock at a large public company is unlikely to double in a short period while the valuation of a startup could go up several fold in the first few years of it’s existence, FileCoin is more likely to experience more growth than BTC in the same time period. Therefore, developers and early adopters of IPFS are more incentivized to be paid by something other than BTC.

I highly recommend listening to Olaf Carlson-Wee’s answer on this subject matter as well.

Twitter

For example, Twitter currently has a feature that allows users to create moments (a curated list of tweets). However, unless the curator is doing this out of their own interest, or if the curator includes sponsored tweets, they have no incentive to do a good job. If users had to pay a small fraction of a TWT to view a moment, and the curator received that payment in return, there is an immediate incentive for the curator to put more effort into content curation. Rather than creating clickbait titles for more ad views, the incentive for producing better content is built directly into the platform. Arguably, users would also be more invested and engaged with the content after having to spend a small fraction of a TWT to view it.

It’s worth noting that while financial incentives are necessary for a cryptocurrency to operate properly, they are “nice to have” in some of the other examples I highlighted. The benefit of using Ethereum to implement this feature is because tokens are a first class citizen of the platform, a standard has already been developed, and it’s easily exchangeable for other tokens (services).

People call me Olshansky