With incentivization protocols, we are now seeing a movement from legacy top-bottom rulemaking to a more decentralized version. Instead of a select few people who are making rules that benefit a select few, these protocols offer a refreshing take.
Essentially, this is a complete and total change from how we’ve always viewed rules. This new “scripting of rules” represents how we are upending the ages-old paradigm for something better.
It’s nothing new for people to create and live by rules to define what is acceptable and what is not. In fact, humans by nature thrive within a social structure with clearly defined rules. But up until recently, rules were steeped in a hierarchical fashion – meaning made from the top. We see this throughout history:
- Government leaders have made laws and rules for its citizens.
- Religious leaders have made the rules for their followers.
- In most modern societies, rules originated from leaders within a patriarchal system.
We are moving into a new era, one that began with the spreading of information via the internet and is now being brought to light through blockchain technology. Let’s begin with a discussion about social rule systems, and end with bitcoin and Ethereum.
Social Rule System Theory
Social rules systems involve norms, regulations, laws, taboos, and customs. They saturate our family lives, our social lives, our careers, and our religion. This creation of social norms is a universal theme found across human civilizations and geographic regions.
But rules are not stagnant or set in stone, even though they may seem to be. Most rules adapt to cumulative experiences so that there’s an innovative aspect to rules and regulations. Take, for instance, the civil rights movement in the US, which was put into law in the 1960s, yet is still evolving and causing humans to adapt.
What if you don’t want to follow a rule?
Whether or not someone actually follows a rule can involve multiple factors:
- They may want to gain benefits or avoid losses.
- A rule may have been determined sacred or integral to a person’s status or identity, as in with the scientific community, a political environment, or within a religion. A person’s self-worth is thus wrapped up in rule-following.
- Humans follow rules and often try to get others to follow them because the rules make sense in how they view the world.
- Social sanctions usually back up formal rules. For instance, the rule against going to the supermarket naked is enforced not only by possible jail time but also by the loss of social standing. To stay in one’s social group, adherence to the organizing rules is necessary.
- Rule following is habit driven, and humans often follow rules not so much because of the perceived consequences, but because it becomes routine. So rule-following is learned behavior that is constantly reinforced. Conformity eventually becomes a habit.
“Rules are not laws, they can be ignored or broken, if we admit that human beings are self-governing agents rather than objects controlled by external forces…” – Social Rule System Theory
Humans naturally love rules
Even though a rule may not be enforceable, humans still strive to establish order with rules and often follow them without incentivization. But often, people do not know all the consequences of compliance; they are following the rules only because it is the ‘normal’ thing to do.
For instance, a person may be taught and have it reinforced throughout their life that one religion is the only religion. Practicing another religion is a sin and punishable by banishment from the religious (and sometimes even the familial) group.
But those that adhere to these religious rules are often not aware of the hidden costs, such as the potential difficulty of meeting a life partner within the narrow rule structure of their religion.
While there are many reasons that compel people to follow rules, they don’t normally comply because they will get paid something. Through monetary incentivization, a different kind of rule system is possible.
When incentivization models work – and when they don’t
A study on incentivization models found that whether or not they work at all, in the long run, is dependent upon three major factors:
- How is the incentivization model structured? For example, an incentivization program to improve reading scores in kids works better with specific books in mind as opposed to requiring a number of (any) books be read.
- Does the incentivization model affect a person’s social or intrinsic motivations? For example, if people were paid money to donate blood, how would that change their social motivations and the perception of what giving blood means? Will they still post a status on social media of them at the Red Cross giving blood? They used to do it as a good work, which gave them a nice feeling. There was social motivation because of other’s perceptions about their giving blood. But now they are paid. How does that affect the perception of giving blood? The intrinsic motivation may alter with incentivization because before they gave blood to do something good, and now money is involved with that decision-making process.
- What happens when incentivization stops? Does behavior end altogether or does the incentivization help to create long term habits? For a program that helps people stop smoking by monetary incentivization, would they continue being a non-smoker when the program ends?
When incentives conflict
Preventative health is another area of study where researchers are studying the effects of incentivization. As an example, think of a healthcare model where patients receive monetary incentives to exercise more.
Healthcare costs are reduced, for instance, when the patient no longer needs certain blood pressure or Type-2 Diabetes medicine due to their exercise habits. The side effects of the drugs (not taken) are reduced as well, providing additional intrinsic motivation for patients.
But none of these incentives make sense for modern medicine, which is based (in theory and economically) on using prescription drugs to suppress symptoms. So while the incentives are clear for patients, they actually conflict with the incentives of the healthcare practitioner in the current system.
When developing rules and regulations, it is thus important to view the impact of the rules from as many angles as possible.
Incentivization in Governance
In our modern world, one might say that the top-bottom rule structure we have is a bit out of hand. Take the American tax code, for instance. In a country that was founded on freedom and whose citizens balked at English taxation, it’s pretty ironic that the tax code today is thousands of pages long. That’s a lot of rules.
The top-bottom rulemaking is intensely clear here – it is the US government making the rules. That government that we all know is highly influenced by corporate special interests and where policymakers are not in any way incentivized to do a good job. They will get paid no matter what rules they make until they get voted out (in elections which are also heavily influenced by special interests).
“Bitcoin depends on Bitcoin to incentivize miners who are investing their resources. Their tokens become an incentive for behavior.” – Blockchain Can Transform Government
A new paradigm for rulemaking – incentivization
When you think of blockchain projects and incentivization, you might immediately jump to thoughts of cryptocurrency tokens. And they are an integral part of the blockchain movement. But the first cryptocurrency, bitcoin, has taught us a new way, not just of money, but of making rules.
The technology behind bitcoin enables a new kind of rule system. It uses incentivization and game theory to create an ecosystem where every participant has a stake in the whole system. The success of bitcoin is the success of everyone that owns it.
That may sound like the USD or YEN to many people. If the USD is doing well, the money in Americans’ pockets is worth more. The difference is in the rules. Think about some of the banking rules that US citizens are bound to if they want to transact in USD:
- They cannot make a transaction of more than $10,000 in cash without creating a flag that must be reported by bank personnel to the feds.
- Their banking data is not owned by them; banks own it and can sell it to the partners they choose.
- Bank customers cannot make more than 6 online transactions to and/or from their savings account in a 30-day period or there is a flag that prompts a letter threatening account closure.
- Americans have limits as to how much they can withdraw (of their own money) per day through ATMs.
- Additional financial services are only available to qualified individuals, based on rules that evolve and can change at any time.
- To have a bank account, you must have a minimum deposit and verify your identity.
These are just a few of the banking rules that we have no choice in creating but are compelled to comply, or risk losing access to the vast and all-encompassing American financial network. Now, let’s talk about the rules around the two most important blockchains: bitcoin and Ethereum.
What are the rules for bitcoin and how were they predetermined? Satoshi Nakamoto, whose identity we have yet to ascertain, wrote the rules clearly in the white paper, Bitcoin: A Peer-to-Peer Electronic Cash System. Nakamoto published it shortly after the 2008 recession.
The prevailing belief is that bitcoin was created as a solution to the corrupt money system that our government had engineered starting with Nixon when fiat replaced the gold standard and quantitative easement and other manipulations became the “political currency”.
So, bitcoin emerged and at first, only a few people took notice at all. Slowly, over time, the Bitcoin network has grown so that after ten years, there are an estimated 32 million bitcoin wallets as of this writing. Additionally, bitcoin is now the top-performing asset in the world over the last decade.
What is bitcoin?
Bitcoin is a digital cash system built on incentivization rules, a consensus protocol, and game theory. What does all this mean? Bitcoin is an algorithm whose users must play by the rules or be shut out of the system. Here’s how it works:
- Miners purchase special hardware (mining rigs), download the bitcoin blockchain, and help to verify transactions, adding ‘blocks’ of them to the ‘chain’. Mining rigs compete in a computational game to ‘win’ the next block. Their reward for winning is newly minted bitcoins. It’s also a miner’s job to verify that a double-spend has not occurred.
- Miners are also there to secure the network. The more miners, the more secure. That’s because bitcoin is decentralized. The software and all the transaction records sit on a distributed ledger that is downloaded and kept in real-time by all the miners. This is in stark contrast to banking software, which rests on a centralized server, thereby taking on increased risk from hacks.
- By following the rules, miners are rewarded with bitcoin each time a verified block of transactions is added.
- Anyone with an internet connection can become a miner on the Bitcoin Network.
- To hack bitcoin, not only would you have to access the thousands of computers worldwide who have a copy of the blockchain, but you’d also have to essentially ruin the blockchain in order to change it. And it would take so long and use so many resources, it would not be worth it to do so. Bitcoin is virtually immutable.
- There will only ever be 21,000,000 bitcoins minted over a strict schedule. Therefore, inflationary manipulations are not possible. The market will determine bitcoin’s value, which currently is about $8000 per coin.
- Mined bitcoins can be traded peer to peer with no 3rd parties necessary. Wallet to wallet, with no bank necessary. They can be traded on hundreds of crypto exchanges and over the counter exchanges. Bitcoin can also now be used as currency for almost every crypto business and application, as well as at a growing number of traditional retailers.
How to bitcoin’s rules work?
The Bitcoin Network is a self-running algorithm that was created to benefit all users that follow the rules – the same rules that benefit the network itself.
But these rules don’t change and evolve as you see with banking regulations. US Banks were once forbidden to have in-house financial planners, insurance agents and brokerage. But those rules were loosened and now they can. Banks once guarded your financial data on pencil-drawn ledgers that were kept in vaults. Now, they sell it to their financial partners and spy on you for the US government.
Bitcoin’s rules were developed by Satoshi Nakamoto and because of their incentivizing nature, they’ve kept the Bitcoin Network secure and growing exponentially for ten solid years.
The 2nd blockchain in this discussion is Ethereum, which is to governance what bitcoin is to money. Here’s why:
Ethereum is a platform that enables developers to build decentralized applications (Dapps) on top of the Ethereum Blockchain. By using something called smart contracts, automated transactions and contracts are carried out according to predetermined rules that follow along within Ethereum’s incentivization protocol.
In more general terms, Ethereum is the place to build applications where the rules are hardwired in. It’s even been the place where DAOs are created or Decentralized Autonomous Organizations. DAOs allow for the creation of autonomous corporations that play by the rules set forth and carried out via smart contracts.
How are DAOs different?
This type of business structure is really the opposite of the hierarchical system we have today. In a modern corporation, the business must put the shareholders above all else. If it means merging and causing the loss of hundreds of local jobs, then so be it. Not all participants in the banking system benefit from the rules.
DAOs can offer a new way of governing. Rules are created by the Dapp creators. Participants who download the Dapps are incentivized with Ether, the native cryptocurrency, or other Ethereum tokens, to follow the rules that secure the system and keep it running smoothly.
Who owns a DAO? No one, just like bitcoin. Rulemaking in both the Ethereum Dapps as well as for the Bitcoin Network is predetermined and set up to benefit the entire ecosystem, including every single participant.
Bitcoin and Ethereum are the future of money and governance. That’s because they offer a more secure and sensible system of rules that is free from censorship and manipulation. Every person that participates in these protocols has the same fair shake. The rules have changed, the script has flipped.
- The Pitfalls of Fiat Currency
- How Bitcoin Works
- Ethereum Explained in Layman’s Terms
- DAOStack: The Future of Smart Companies