Blockchain Incentive Structures: What they are and why they matter [Commentary]

Original Link: Blockchain Incentive Structures: What they are and why they matter

Author: Cathy Barrera, PhD

Summary & Commentary

Understanding the nuances of incentives is crucial for founders of blockchain platforms. Incentives play a key role in encouraging participant cooperation, thus creating the value that ensures the platform's success. Incentives are ubiquitous and extend beyond financial rewards, influencing the behavior of system participants by altering the relative costs and benefits of their choices.

A few examples include university grades and pay-for-performance systems. For instance, grades can incentivize students to study hard or cheat, even without any monetary benefit involved. Similarly, pay-for-performance systems reward individuals based on their work output.

In the blockchain and cryptocurrency context, incentives can influence users' behavior. An experiment at MIT, which involved giving each undergraduate student $100 worth of Bitcoin, demonstrated that non-monetary costs and benefits play a significant role in influencing behavior. The students were given a choice of different wallets for storing their Bitcoin, each offering different levels of privacy and ease of use. Despite no monetary differences between the wallets, students' wallet selection process was influenced by these factors, indicating the power of non-monetary incentives.

Moreover, how a blockchain platform is designed can significantly influence the incentives it provides. Even minor design elements can have a substantial impact on user behavior and platform adoption. This highlights the importance of viewing all decisions through the lens of incentive design.

Three significant fields of economics - contract theory, market design, and the economics of information - focus on how system designs can influence behavior. At Prysm Group, these fields are used to design platforms for blockchain ventures, incorporating both tokenized financial rewards and non-monetary incentives like reputation systems.

From an economics perspective, incentives form the crux of the system and are a critical part of the overall economic design of effective blockchain platforms. Incentives range from miner rewards and transaction fee-setting mechanisms to token-curated registries and prediction markets, serving as the foundation of blockchain platforms.

Here are some actionable insights based on this discussion:

1. Incentive Design: When designing your blockchain platform, consider both monetary and non-monetary incentives. Understand how different design elements can influence user behavior.

2. Influence Behavior: Leverage the power of incentives to encourage cooperation and value creation on your platform. This can range from token rewards to reputation systems.

3. Understand the Costs and Benefits: Remember, incentives are all about balancing costs and benefits. Understand how different costs (both monetary and non-monetary) can influence your users' behavior.

4. Economic Design: Consider incorporating concepts from contract theory, market design, and the economics of information in your platform design. This can help you create a more effective incentive system.

5. Continuous Learning: Stay updated on the latest research and developments in incentive design for blockchain platforms to ensure your platform remains effective and competitive.

Remember, the goal is not just to create incentives, but to design them in a way that helps realize the vision of the platform founders and benefit its users.