Designing The Right Incentive Structures
Cryptoeconomics and incentive structures: we’re just getting started…
Taking a break from our decentralization series to focus on two excellent posts on cryptoeconomics and incentive structures that are worth reading /listening to and pausing on:
- Vitalik Buterin on cryptoeconomics and markets in everything (podcast)
- Do not design for speculators by Tony Sheng (blog post)
One of the most interesting things Vitalik explains is that cryptoeconomics compare to real-world economics but with constraints enforced by maths and algorithms. For example, blockchain actors are anonymous, which means that the lowest possible downside for bad behavior is financial loss (e.g. a stake of 70 ETH is locked until the participant has demonstrated good behavior and if not the money is burnt) vs. in the real world economic participation is tied to identity, which means that punishment for bad behavior can go further (e.g. prison). Therefore the key to designing a good blockchain ecosystem is to create the right incentive structures within these constraints, which surface unprecedented game theoretic challenges.
Tony looks at the state of today’s blockchains where the incentives lie in rewarding token holders rather than rewarding those that improve, build on, or use the network. He looks at how today’s cryptoeconomic incentives applied to private property would look like and concludes that it’d lead to suboptimal resource allocation and unequal wealth distribution. He argues that the winning blockchains will be those that design for efficiency, not speculation and then illustrates how 0x and Decentraland are both achieving this.
I find these posts interesting for three reasons:
- Speculators play a role in innovation: The 2017 ICO bubble attracted money and talent to blockchains but with regulators entering the scene, 2018 became about building and creating value for society. What we’re seeing is that speculation isn’t that bad, it’s actually necessary to spark technological revolution and growth.
- Economic theories are going to evolve faster than ever before: The digitalization of economics is creating a rich experiment lab enabling fast feedback loops for innovation. As a result, expect there’ll be many interesting economic theories and applications appearing these next years.
- Governance that enables adaptability will be critical to success: The blockchains best positioned to win in the long term will be those that have a governance system designed for agility so that incentive structures can be fine-tuned in the face of set-backs and new findings.
From around the web
The Future Of Network Effects: Tokenization and the End of Extraction (Medium) — Continuing on the theme of aligning incentives, this post explores the impact of this on network effects and argues that these will be so powerful that they’ll have the potential to “to supplant some of today’s most powerful companies.”
Is plutocratic on-chain governance really a bad thing? (Mosaic blog) — Long analysis of what on chain governance is and whether it could become plutocratic.
Slow Money Crypto (Medium) by Mike Maples — Solid piece that explains why crypto is no different than other tech innovation waves; founders, builders, and investors who are slow money (i.e. building to last) will out win those who are in for the short-term gains.
Ethereum’s Most Heated Tech Debate Is Proving It’s Far From Over (Coindesk) — The debate of whether the $239m lost due to a startups mistake should be recovered has resurfaced. Main arguments against are that (a) this establishes a precedent for future contentious code changes, and (b) it removes the power of decentralized governance.
Blockchain by the Numbers: 33 Stats on Ethereum and Consensys (Consensys blog) — Insightful and fun facts, e.g. “12,000 Ether lost to typos!”
MyCrypto’s Security Guide For Dummies And Smart People Too (MyCrypto blog) — The ultimate guide to keeping tokens safe.
@RealRossU (Twitter) — Ross Ulbricht, creator of the Silk Road and imprisoned for life, joins Twitter. Highly recommend reading his Wired story from a few years back: The Untold Story of Silk Road Part 1 and Part 2.
Smiley corner 😄
Simple flowchart:
Weekly newsletter published internally at Google. The views expressed are my own and do not necessarily represent the views of my employer.
