Problem of Fractured Incentives
Last updated
Last updated
Any network or initial core development team running a blockchain today needs to organise between three kinds of network participants:
1. End users, who are interested in growing the value of their token holdings (in addition to enjoying security, scale and privacy in their transactions).
2. Third-party Infrastructure Providers, who are crucial for the decentralisation of networks and also require incentives to participate in network activities such as validation, consensus, data availability, routing, sequencing, proving, etc. These incentives are usually paid out by the network based on the kind of computation provided. Additionally, to act as efficient validators, infrastructure providers must stake the native token of the network to guarantee honest behaviour. However, this has the unfortunate consequence of making the network token even more illiquid.
3. Developers, who usually have to be persuaded to join and build inside a network in exchange for grants and incentives.
Each one of these arrangements creates a ‘chicken and egg’ problem for the other two groups of participants. For example, without a sufficient user base, it is difficult to cultivate attractive dApps/projects or engage infrastructure providers. Similarly, without a reliable developer community, it is challenging to attract enough users to engage in the network. Finally, it is difficult to retain infrastructure providers to scale the network without the necessary throughput that comes from users enabled by developers.
As mentioned earlier, current blockchain networks mitigate these problems in a fractured manner. To build a user base, networks and projects must essentially hand out tokens to attract their participation. To attract infrastructure partners, they must incentivize their participation using fiat, network payouts, and transaction fees. Similarly, to attract good developers to build on a network, fiat or token-based grants are provided by community development teams.
The emergence of staking and restaking protocols is only a half step in correcting this problem of misaligned incentives in blockchain networks. We propose below a new model of operating blockchain networks that is more economically efficient and creates sustainable user engagement.
