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The Power of Incentives

“Show me the incentives and I will show you the outcome.” – Charlie Munger

​If there’s one thing I’ve learned since getting into crypto, it’s that incentives drive everything. After all, Bitcoin only works because of the economic incentives that underlie the system. For those who may not know, I’m referring to the coinbase reward that incentivizes miners to expend CPU time and electricity as described in section 6 of the white paper.

The point is incentives matter. They influence our behavior in dramatic ways, and without them, who knows where we would be as a species.

I’ve recently been able to see first-hand how powerful incentives truly are, and if you follow me on Twitter, you probably have too. By creating an incentive for people to produce eCash related content, I’ve been amazed by the amount of creativity that’s been on display. But I don’t believe what’s been happening just happens on its own. For example, you could have thrown more money at the problem and easily achieved less satisfactory results.

As they say, the devil’s in the details.

For example, imagine if I had said you could only win once, and I’d focused on creating an equal outcome rather than giving people an equal opportunity. Or what if I was someone of questionable integrity, someone the community couldn’t trust to actually follow through on his promises. I believe the contest has produced good results in part because people have come to see me as someone who is trustworthy.

When Satoshi first released Bitcoin, the rule was for the entirety of the block reward to go to miners. This made sense because what was needed then were people to support the network by running mining nodes. But ask yourself this, who else could the reward have gone to? While paying miners isn’t something that requires trust, paying developers does, and it isn’t as if there were a myriad of trustworthy Bitcoin developers the moment Satoshi released his code.

That doesn’t mean that would always be the case, however, and once Bitcoin was up and running with plenty of hashpower securing the network, I believe it was a time for a change. The problem that needed solving was no longer network security but network scaling. But because the incentives were never changed, the network’s security continued to grow while Bitcoin’s scaling problems remained largely unsolved. What was needed weren’t more miners, but more engineers. Not only more engineers but the right engineers, and until they were found, it could be argued there was no point in making such a big change to the rules that had been in place since the beginning.

However, I believe we have found in Bitcoin ABC a development team finally worth changing the rules for. A team that has earned the right to get paid for their work and be directly incentivized by the network to help it succeed. With the activation of the new coinbase rule, Bitcoin ABC now has more skin in the game than just about anybody involved in the ecash project, and the more valuable they can make XEC, the more resources they will have to use for themselves.

Like I said, incentives are important, but so is being aware of the problem you are trying to fix. If you’re using your incentives to solve the wrong problems, then you’re not going to accomplish your goal.

Luckily, I believe that this is a project that understands the power of incentives, understands the problems that need to be solved, and that the devil’s in the details.

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A while back I tweeted that I had “realized something about eCash and free markets I never thought of before.”

What I realized was that incentives can work in more than just one direction. Whenever I think of supply and demand, I usually see it as a one way street. Someone creates the supply (i.e. Steve Jobs and the iPhone) and then the demand follows. Isn’t that what we usually see happen? Someone has an idea for a product, perhaps a product they have a demand for, and once they create it, others realize they want it as well.

But what I had somehow forgotten was that it also works the other way. People can create a demand and then the supply follows. Let’s say there were a million airplane entusiasts out there who wanted Elon Musk to make an electric plane for them rather than spending his time on cars, rockets, neuralinks and everything else he’s working on. If they each put in $1000 and raised $1B, would they be able to entice Elon to make them the ePlane of their dreams? I think they could.

Well, I believe that XEC gives us an opportunity to do just that but with our monetary system. By purchasing XEC, we are creating a demand for a reliable ecash that can help change civilization as we know it.

You might be thinking to yourself that’s what every other cryptocurrency is also trying to do, but here’s what makes XEC different. Usually when a company produces a product, the profits are then reinvested into improving said product. The thing is, whenever you buy Bitcoin, the profits are mostly earned by hardware manufacturers and energy companies, not to mention exchanges and the traders they serve. So while the efficiency of Bitcoin mining rigs have improved a great deal over the years, and the bank accounts of the best traders have grown fatter, the Bitcoin protocol hasn’t seen the same kind of growth. This is because there is no direct incentive for talented engineers to solve Bitcoin’s most difficult problems.

This is what makes ecash different. And yes, I know ecash isn’t the only coin with a built-in funding mechanism for development, but here’s what sets eCash apart. The coinbase reward for XEC didn’t come about as a result of central planning, it came about as a result of free market economics.

Having 8% of the block reward go to a developer team wasn’t determined by Satoshi. It was the result of years of competition between Bitcoin developers, until finally, Bitcoin ABC became the first Bitcoin development team to earn the right to charge the network for their services. Now we finally have a version of Bitcoin where the profits not only go to miners but also to engineers who can solve the right problems and remove the bottlenecks to finally deliver a truly reliable ecash that the world can use.

For me, ecash has the opportunity to prove that the saying, “if you build it, they will come” can also work in reverse.

If people come, they will build it, and by they, I mean Bitcoin ABC.