How do you create incentives for blockchain users?

1 Types of incentives

Incentives can be classified into two main types: extrinsic and intrinsic. Extrinsic incentives are external rewards or punishments that motivate users to perform certain actions or behaviors. For example, Bitcoin miners receive block rewards and transaction fees for validating transactions and securing the network. Intrinsic incentives are internal motivations that drive users to engage with the blockchain for their own satisfaction, curiosity, or values. For example, some users may support a blockchain project because they believe in its vision, mission, or social impact.

2 Factors to consider

When creating incentives for blockchain users, you need to consider several factors that will impact the goals and objectives of the network and its stakeholders. These include the costs and benefits of participating in the network, such as hardware, electricity, bandwidth, time, and skills; as well as the risks and uncertainties of the network, such as security breaches, forks, attacks, and regulation. Additionally, you must account for the trade-offs and constraints of the network, such as scalability, performance, privacy, and governance. Lastly, you must consider the diversity and heterogeneity of the user base in terms of their preferences, expectations, and behaviors.

3 Methods of creating incentives

Creating incentives for blockchain users can be done in various ways, such as through tokenomics, mechanism design, and gamification. Tokenomics involves the design and distribution of native tokens or cryptocurrencies, which can affect the supply and demand, price and volatility, and allocation and governance of the tokens. Mechanism design refers to the rules and protocols that regulate the interactions and outcomes of the network, influencing its security and fairness, efficiency and quality, and innovation and evolution. Gamification uses game elements to enhance user experience and engagement, providing fun and enjoyment, challenge and competition, as well as feedback and recognition.

4 Examples of incentives

Illustrating how incentives work in practice, let's look at some examples of blockchain projects that use different methods of creating incentives for their users. Ethereum combines tokenomics, mechanism design, and gamification, enabling users to earn Ether (ETH) through mining, staking, or providing liquidity. Additionally, Ethereum supports various DApps offering gamified features such as NFTs, DAOs, DeFi and social networks. Steemit is a social media platform that utilizes tokenomics and gamification to reward users with Steem (STEEM) or Steem Dollars (SBD) for creating, curating or commenting on content. Steemit also leverages gamification features such as badges, rankings and leaderboards. Algorand implements a novel mechanism design to enable fast, final and forkless transactions; it also uses tokenomics and mechanism design to reward users with Algo (ALGO) for participating in the network or joining the Algorand Foundation.

5 Challenges and opportunities

Creating incentives for blockchain users is a complex endeavor, requiring the careful consideration of economic, social, and technical factors. Challenges and opportunities include aligning the incentives of stakeholders, designing incentives to be flexible and sustainable, testing and evaluating them for effectiveness, efficiency, and robustness, learning from other blockchain projects, and experimenting with new ways of engaging users. All of this must be done while avoiding conflicts of interest, inflation or deflation, unintended consequences, loopholes or exploits.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?