Incentive Designs Disrupting the Market Power

At first, it all seemed like a joke.

Someone has been able to put together decades of research, using the maturity of supporting technologies such as encryption, the internet, peer-to-peer networks, broadband — to name but a few -, created the architecture of the first cryptocurrency, to run in January 2009. Someone bought two pizzas with 10,000 bitcoins and … see what’s worth today!

Nakamoto wrote a software source code, published it on the internet, proposing the following: “If you provide security to this network and help that financial network operate, you will be rewarded.” The logic was transparent and written in programming language.

The breakthrough brought by the first Blockchain is not just in computer science … the “big move” lies in the incentives.

Computational power ensuring network security

As more and more people realized the incentives tied to Bitcoin, and began “plugging” their computers to provide network security, Blockcoin Bitcoin has become increasingly viable. This is because, now, there is more computational power guaranteeing transactions.

What’s interesting about this scenario, regardless of its current market price, is that for the first time in history someone wrote a code and ten years later we have a global network that calculates numbers in order to actually build trust across a platform , without the traditional intermediaries.

In this context, it is interesting to talk a bit more about how the logic of incentives works.

The logic of incentives

People saw the Blockcoin Bitcoin model and took it to another level.

The logic comes down to finding out …

How do you encourage people to get what they want?

Think of incentives, and how you can use them to get what you need. In the case of Blockchain Bitcoin, incentives are used to obtain network security.

In blockchain applications such as Filecoin or Sia, incentives are used to stimulate data storage.

Incentives are therefore used to attract and reward top talent, and attract investors.

Finally, incentives should also be used to attract users — people who will find use in these new services, and are a fundamental part of any digital ecosystem.

In this context, early adopters can play a key role in the diffusion of new technologies. This is because they accelerate the diffusion curve of a new platform, service or product.

So if you reward early adopters with tokens, and do it right — aligning the incentives for them to play a role in that ecosystem — their contribution will ensure a more robust ecosystem in the long run.

But back to the core of this article, how can blockchains lead us to economic advancement?

One must realize how the use of incentives in Blockchains makes markets safer and more efficient.

Public and private blockchains are “not” two sides of the same coin

It is common for proponents of private blockchains to point out that public blockchains do not fit into existing regulatory frameworks, are difficult to monitor and control, and slowly process transactions — if compared to the speed of blockchains that have been detained — they lack flexibility and ultimately harm the planet due to the high power consumption.

We are bombarded with stories that describe the criticisms pointed out above every day.

What no one talks about is … what do private blockchains leave to be desired compared to public blockchains?

Private blockchains, while reducing verification costs, do not potentiate the “cost of the network”.

Verification costs comprise all the expenses necessary to inexpensively verify the attributes of a specific transaction without incurring additional costs or performing an “extra and expensive audit”.

Every blockchain is important because it reduces “verification costs”. But…

Really revolutionary blockchains reduce “network costs” — all the labor and capital expenditures needed to ensure that transactions in a traditional infrastructure happen.

Only public blockchains (not granted) combined with a native token (incentive design) can be used to start a digital platform without the need for a central intermediary.

Driven only by the “incentive design” embedded in their protocol (a native token, for example), “public” platforms enjoy the benefits of an infrastructure without the main cost normally available: market power.

In his participation in Future Thinkers, Vitalik Buterin, highlighted the cost savings provided by public blockchains. He said:

“There are many intermediaries who end up charging 20% to 30% and if the concept of decentralization takes off and does well, then they will also fall to near zero” — Vitalik Buterin.

By reducing the cost of the network, public blockchains also enable a refined definition of digital property rights, including rights to the underlying data.

Takeaway

Blockchains are bringing tremendously beneficial transformations to society — with the emergence of new business models and the creation of platforms without their higher current cost, the middlemen.

In this context, incentive designs play a key role. They allow for a reduction of costs and allow the return of competition in previously highly concentrated markets.