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Incentive Engineering

How can you engineer incentives into your products and services to influence positive behaviour?

Engineer incentives into permissionless protocols that align behaviours with better outcomes.

tip

Show me the incentive and I will show you the outcome - Charlie Munger

Context​

Tokenomics Purpose​

Create a standardised framework for engineering protocols that create sustainable tokenomics for growing communities

  1. Token systems are complex and require careful design to be effective and sustainable.
  2. The core components of a token system include supply, demand, and price stability mechanisms.
  3. Successful token systems align incentives between network participants and token holders.
  4. Token design should consider both short-term and long-term implications.
  5. Regulatory compliance is crucial when designing and implementing token systems.

Mechanisms: Tokenomics touches on human behavior, technology and economic design

  • Behavioural psychology
  • System design & architecture
  • Finance
  • Economics
  • Blockchain technology
  • Financial history
  • Political science

Tokenomics Use Cases​

Financial instruments on the blockchain that enable the permissionless flow of value.

Use Cases:

Tokenomics Design​

Token design is a complex process that requires careful consideration of various factors. Evolve checklists to ensure you're covering all bases.

Intended Outcomes​

Have a clear understanding of the problem to solve through token design.

  • What purpose does the token serve?
  • Value Capture
  • Distribution
  • Demand and Liquidity
  • Is your token actually serving your goal?

Distribution​

Model supply and demand dynamics!

  • Who wants your token?
  • Why is someone using it?
  • Who's selling your token?
  • How are tokens entering the market?
  • When and how many tokens?

Liquidity​

Token liquidity!

  • How can people access your tokens?
  • What is the expected volume?

Token Supply Design​

  • Define the initial token supply and distribution method
  • Determine the token emission schedule (if applicable)
  • Consider implementing token burning mechanisms
  • Evaluate the need for a maximum supply cap

Token Demand Creation​

  • Identify core utility functions for the token
  • Design incentive structures to encourage network participation
  • Implement staking mechanisms to create long-term demand
  • Consider governance rights as a demand driver

Price Stability Mechanisms​

  • Assess the need for algorithmic stabilization
  • Evaluate collateralization options for stablecoins
  • Implement circuit breakers or trading halts if necessary
  • Consider dynamic fee structures to manage volatility

Incentive Alignment​

  • Map out all stakeholders in the ecosystem
  • Design token allocation to align interests of different parties
  • Implement vesting schedules for team and investor tokens
  • Create mechanisms to reward long-term holders and active participants

Regulatory Compliance​

  • Consult with legal experts on token classification
  • Implement KYC/AML procedures if required
  • Consider geographical restrictions on token distribution
  • Develop a clear communication strategy for regulatory matters

Technical Implementation​

  • Choose an appropriate blockchain or layer-2 solution
  • Implement robust smart contract security measures
  • Conduct thorough audits of the token contract
  • Design upgrade mechanisms for future improvements

Community and Governance​

  • Develop a clear governance framework
  • Implement on-chain voting mechanisms
  • Create a transparent proposal submission process
  • Establish community channels for discussion and feedback

Problems to Solve​

The main problems with crypto incentives are:

  1. Misaligned incentives compared to traditional startups.
  2. People getting rich without solving real problems or creating value.
  3. Perverse incentives that reward undeserving behavior.
  4. Short-term thinking focused on quick paper returns rather than long-term business building.
  5. Lack of focus on creating real, sustainable businesses and economies.
  6. Rewards for consensus ideas rather than contrarian or innovative approaches.
  7. Starting with technology and tokens instead of solving actual problems.
  8. Circular trading of tokens on smart contracts rather than producing real economic output.
  9. Difficulty in creating self-sustaining protocols due to misaligned incentives.
  10. Market dynamics that favour familiar, consensus bets over truly innovative ideas.

Research​