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Cryptoeconomic Tools

Parallels exist between traditional finance and the world of blockchain-facilitated finance. You may have heard the associated terms tradfi and defi. Fundamentally, these two general frameworks have the same desired user-base and set out to achieve similar (if not identical) goals. What happens in between the consumer and merchant is what differentiates the two. In the case of tradfi, we have a hulking middle man consisting of banks and financial institutions abound, while defi utilizes hardware and software as the facilitator. The idea might be that using robots and robot language removes the incentive and/or ability to manipulate the system. If some humans are in control of upholding the rules, then surely some humans will find ways to bend them.

There are plentiful roadblocks to address before this ideal defi framework becomes usable on a mass scale, but we can take solace in what positive motion we've seen so far. Most notably, experimentation with cryptoeconomic tools such as staking, airdrops and public goods funding have proven to be a series of attractive features to both the dabblers and the power-users. When you have a traditional savings account, you're rewarded with a few percent yield for allowing the bank to use your money for investments, etc. When you join a new bank and spend enough money, you might earn a $300 new member bonus. When you want to start a business or already have but require funding to continue, you can either take out a high-interest loan or sell a portion of your business to an investor. This is a very vague view of our current system, but it's here to provide a backdrop for a few progressive models.


The following is a conversation with host Humpty Calderon and several web3 builders on the Ontology Spaces.


Staking is a hoot, and although it looks a lot like using a savings account it has a few key differences and side-effects. Delegating tokens to a validator can assist in storing and securing a network, and in performing this task, the validator and its stakers are usually rewarded in a native token of the blockchain. This staking reward is often enough to not only eclipse inflation but make some extra money on the side as payment for helping to operate the network. Another benefit to holders of that token is that much of the token is locked out of circulation into the validator, thus decreasing the available supply and increasing token price in the case of any demand increase.

Airdrops look a lot like new member bonuses for bank accounts and credit cards-- more or less a reward for using a system. One of the main differences between the two is that airdrops can be targeted to include a complex array of behaviors over any period of time. Unlike banks, airdrops don't just require you to spend $x over a limited time period or sign up for a service. Instead, they typically collect data with regard to several valuable metrics for the host company. This can allow rewards to compile for those not only using the outlined systems in a way that's preferable to the company, but also for those power-using the offered features in advance of a public release such that any bugs can be confidently worked out in the early days. Instead of hiring an audit service for a new field of technology that might be unfamiliar to service providers, the company can reward power-use in order to uncover these problems over the course of wear-and-tear similar to that of projected regular use.

Finally, we can't close this conversation without addressing the powerhouse that is retroactive public goods funding. In the case of a layer two solution like Optimism, RPGF is used to make sure builders that provide a general good in the ecosystem are rewarded from a fund whose coffers are filled by the sequencers revenues provided by use of Optimism mainnet. So, when a tool is built that adds value, network traffic increases. This increased traffic generates fee revenue, which is in turn distributed to public goods funding all over again. The fund rewards those who have already provided value. As we know, positive reinforcement is the pyschological tool that works to facilitate the best possible outcome, and in this case, building something that generates no income for the builder but works for the network inspires a financial reward once that income is generated for the chain.

The incentives in web3 ecosystems are largely positive-reinforcement-based, and because of this they inspire productive and thoughtful action from users and builders-- even in the case that those users and builders aren't necessarily aligned with the use-cases they're supporting. A world where positive reinforcement is king and algorithms are castle is a beautiful ideal that it seems we're on the path to achieving. We can do good, and by doing good we can do well.


For more on the topic, check out the full conversation that Humpty Calderon hosted with several web3 contributors on a recent Twitter Space as a part of the ongoing Thursday Talks series.


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