The economic incentive is the motivation a player gets to behave in a particular manner. With needs, wants and desires as the priority for the player, it works towards the preference set by the motivator for a particular incentive.
As a contingent motivator economic incentives are classified in multiple forms. The top and the most relevant for the cryptospace being the extrinsic incentives – rewards for a particular behavior and punishment for another.
This type of economic incentive runs on positive and negative reinforcement.
Economics of incentivizing cryptocurrencies
Bitcoin’s incentive scheme depends on the presumption that individuals are sane players. If these players are rational, they are incentivized to participate in mining, buying and holding BTC. The concept of rationality is significant but often taken for granted.
Silvio Micali, an MIT professor and founder of Algorand says, that the creator of Bitcoin probably never imagined its incentive structure would cause capitalist industrial-scale mining pools. He even believes that the system does not need to reward trivial computations. Miners are compensated for their role while validators who don’t invest in overpriced equipment and excessive electricity are not.
With beliefs such as incentives should be the last resort, Micali is building Algorand.
“Algorand’s logic is simple: it ties the security of the whole economy to the honesty of the majority of the economy, and makes it impossible for a small subset of the economy to control the fate of the whole economy.”
To give some background, Algorand is a public blockchain that works on a novel version of the Byzantine Agreement [BA]. Here, players are replaced in each round of communication. In this BA protocol, users do not keep any data except for their private keys, which allows Algorand to replace participants immediately after they send a message.
Vitalik Buterin as the Founder of the second biggest cryptocurrency, Ethereum, believes that such a network wouldn’t work.
Buterin stated that having no incentives at all means there’s no incentive for someone to not be lazy and go offline. While Micali from Algorand believes that all players on the network are honest, Vitalik’s belief is that the majority of the players are not; emphasizing the crypto phrase: verify, don’t trust.
A fundamental insight at the heart of economics is that people respond to incentives
Under the assumptions that:
- Cryptography can be hacked
- All players are honest
- Nevertheless, there will still be bad players and,
- Economic incentives significantly influence human behavior
Financial security becomes important!
The economic incentives drive humans to act in a particular way that makes them bet stakes [tokens, computational power, etc.] on the network to provide support for protocol stability with optimal security through a reward structure that prevents its unethical behavior.
Achieving all of this without an incentive model and keeping the network decentralized might be difficult or rather impossible.
All things considered, users are egotistically unpredictable in nature and they may decline to participate because of their concerns on electricity and data transmission consumption. This is why it is necessary that each user participating in the network receives a satisfying reward to compensate for their efforts. However, suitable incentive mechanisms that can meet the diverse requirements of users in dynamic and distributed peer-to-peer environments have yet not been invented.
Disclaimer note: This article is based on the contributor’s opinions/research and does not necessarily represent the views and opinions of Tron Weekly.