Programmable Incentives

Every person on earth lives in a matrix of incentives. Many were designed for you long ago. The question before us is: Who will control these incentive systems in the future?

Incentive systems are everywhere. You respond to incentives within a system of incentives you didn’t design. Historically, the world’s richest, most powerful people controlled these incentive systems. They want you to live in a great big Skinner Box of their design rather than a prosocial system of your design. They got away with it either by creating unholy alliances with those in control of the guns and the jails or by acting as middlemen who took just a tiny cut of a given transaction in exchange for helping make it happen. That’s why the most powerful companies today are likely Big Tech or Big Finance. The moniker “Big” indicates size, centralization, and their status as monopolistic middlemen. And these companies love Big Government, of course. Any technology that threatens their status must be strangled in its cradle. Otherwise, people-power threatens their cartels.

“One of the first rules of economics is that humans respond to incentives,” software developer Justin Goro reminds us. “Until now, very few people have had the power to craft society-wide incentives without resorting to coercive force.” 

This insight cannot be overstated to appreciate the coming era. In a certain sense, the social singularity will be built on it (or not). Before we explore the implications, let’s break down the ideas a little more. 

First, the blockchain. 

The blockchain is computer code—a digital distributed ledger. We could be talking about any number of distributed-ledger technologies that have arisen since Satoshi Nakamoto’s 2009 innovation, so we’ll use “blockchain” as a shorthand for all of them. And money happened to be the blockchain’s first application. According to economist Jason Potts, though, Bitcoin is not likely to be the most important.

It might seem strange that a ledger — a dull and practical document associated mainly with accounting — would be described as a revolutionary technology. But the blockchain matters because ledgers matter.

Ledgers matter because they’re a way to record facts. Blockchains record facts so they’re community-observable and censor-resistant. In this way, distributed ledgers will be as important to twenty-first-century social organization as double-entry accounting had been to the development of business.

But merely recording facts is not enough. It’s also what can now be recorded.

Enter smart contracts.

Smart contracts allow people to exchange money, property, or anything of value transparently, eliminating middlemen. 

“The best way to describe smart contracts is to compare the technology to a vending machine,” says Ethereum founder Vitalik Buterin. “Ordinarily, you would go to a lawyer or a notary, pay them, and wait while you get the document. With smart contracts, you simply drop a [fraction of a] bitcoin into the vending machine (i.e., ledger), and your escrow, driver’s license, or whatever drops into your account.”

With smart contracts and blockchains, it’s possible to create programmable incentives. That means economics is no longer about obscure models or retrospective explanations but instead engineered, testable ecosystems of value created within peer networks. In short, says software developer Rob Knight, “what people mean by ‘the blockchain’ is just ‘economics, on computers.’”

In other words, programmable incentives. People can align interests in mass- coordination efforts voluntarily. 

People, always fallible and sometimes venal, have long had to be the glue of other people. But along many dimensions, those arrangements will pass away. Smart contracts, like those conceived of by Nick Szabo and improved upon by brilliant innovators such as Vitalik Buterin, allow us to remove fallible human beings from the equation—at least in a number of important circumstances. And in those circumstances, all manner of decentralized applications are made possible.

Developer Justin Goro thinks decentralized applications amount to “a host of humans acting together to achieve a group goal.” Instead of goodwill or trust, “the coordinating mechanism is the glue of blockchain-secured tokens.” To fully grasp the implications, we have to consider how tokenization could eliminate certain kinds of middlemen and yet bind people together in the service of common ends.

The Implications 

In the past, humans had to get big things done through different structures of social coherence. Whether it was allegiance to the Queen and Country or fear of IRS agents breaking down your door, social coherence was achievable. But more and more, getting big things done will be carried out through biomimicry.

That is, we’ll act more like bees.

Distributed ledgers aren’t AI supercomputers that figure everything out or tell us what to do. In many distributed ledgers, more like what bitcoin expert Andreas Antonopoulos calls “dumb networks,” only with fairly smart beings as nodes in those networks. And those beings have billions of perspectives.

“They will act as the connective tissue between humans and machines, mediated by incentives,” writes Goro. “If humans are neurons in the human hive mind, blockchain technology acts as the connective tissue and neurotransmitters.” 

You might say we’ll create pheromone trails for each other.

When all the incentives are aligned such that people are organized into competing hiveminds, the game has changed. No power center is safe. Whether we’re talking about big corporations or big governments, blockchains threaten to dissolve society’s most powerful mediating structures.

Such a claim might seem fantastic in the age of such awesome central powers. But consider this: what’s powerful about decentralization is that it is carried out through the power of persuasion (instead of coercion). When you can incentivize millions of people all at once to change their behavior patterns—and reward them for doing so—incentives align.

This mass alignment of incentives is where big things can be done and big paradigms can change. We have to become much more disciplined in creating and using these technologies.