Incentive Loop Example Three: The Augur Prediction Market

Augur is a prediction market that uses a token to incentive people to report the outcomes of real world events. Holders of the REP token (Short for Reputation) are able to stake their REP to the outcome of an event (usually a Yes/No outcome, but it can be more complicated). For staking to the correct side (as determined as the side that has more REP staked to it), REP stakers are able to receive a small portion of total ETH that has been gambled on the market.

An explainer video is available here: https://youtu.be/yegyih591Jo

The incentive loop that is created is depicted here:

The larger a particular market is (for a bet on a single event: “Who will win the World Series”, “Who will win the election”, etc), the more reward there is for REP token holders to stake their REP to the truthful outcome of the event, since they get a small fee for staking in the majority of stakers.

When REP is staked more and more to the truthful outcome of events, the Augur platform gains validity, due to its track record of providing truth to more and more markets.

Due to the promise of truth that is offered by the Augur platform, more and more niche markets are able to be created, due to their being more Truth to go around (from more REP being staked)

The more markets there are created, the more valued the REP stakers are, as they are the vehicle of truth for the platform. Which in turn, incurs more incentive to accurately stake your REP to the correct outcome of an event.

What is created as a result, is a platform with so many markets available, that you will be able to “Google the future”, using the phenomenon of the Wisdom of the Crowd… or so is the Augur vision. Hopefully the positive feedback loop from the described incentive structure will be able to bootstrap its way into being the vehicle in which humans can see into the future!

Incentive Loop Example Four: AdChain & Token Curated Registries (TCRs)

Token Curated Registries are super cool. If you don’t know these, check out Mike Goldin’s paper on TCRs.

Token Curated Registries are decentralized lists. If you haven’t had your head in the sand, you have been bombarded with these clickbait buzzfeed lists: 100 pet photos that will melt your heart! 13 reasons to breakup with your boyfriend. 43 ways to get out of work. etc etc etc

Token Curated Registries are a way of creating more legitimate lists, by using crowdsourcing and economic incentives to provide value to the system.

Top 10 Colleges in the US,

Top 25 Sushi Restaurants in San Francisco,

Top 100 Multiplayer RPG games,

These are more legitimate, sustainable examples of lists that could, one day, be curated through crowdsourcing.

TCR’s and AdChain (which is a TCR for advertising) work in the following way

A publisher submits an application to be listed on the AdChain list, with an AdChain token deposit A “challenge period” starts during which any ADT holder who believes the publisher is fraudulent can issue a challenge and match the publisher’s ADT deposit. If no challenges are issued during the challenge period, the publisher is accepted into the adChain Registry, and their deposit is returned. If a challenge is issued, the publisher and challenger go head-to-head and ADT holders vote (1 ADT = 1 vote; majority rules) on the outcome. The winner of this vote has their ADT deposit returned to them and is rewarded some fraction of the the loser’s deposit. The remainder of the loser’s deposit is divided amongst the majority voters. If the vote is in favor of the publisher, they are accepted into the adChain Registry. If the vote is in favor of the challenger, the publisher is not accepted.

The Incentive Loop

TCR token-holders want their TCR to grow in value. This incentivizes them to monitor/curate the list in which they have stake in. Using a TCR of Top 100 Sandwich Restaurants as an example, if a Token-holder sees that Subway has submitted an application to enter the list, they are incentivized to submit a challenge to decline Subway a spot on the list (sorry subway). The premise is that if a list of Top 100 Sandwich Restaurants has Subway on it, it clearly is a poorly curated list, and a good sandwich shop is less incentivized to attempt gain entrance. TCR token-holders also want more tokens (who doesn’t want more tokens?) If Subway submits a 100-token deposit to Top 100 Sandwich Restaurants, a token-holder who believes that other people are going to vote ‘no’ on allowing Subway entrance, will also vote no, because Subway’s 100-token deposit will be forfeited and allocated to the majority-voting decision, allowing those that vote with the crowd to accrue more tokens.

Sandwich shops want to be on high-quality TCRs. If you are Al’s Gourmet Sandwich Shop being on Top 100 Sandwich Restaurants gives your sandwiches a place of high regard, due to the prestige of the TCR that has been curated by sandwich connoisseurs. If you make it on the list, your sandwich shop will be blessed by a constant influx of sandwich-eaters willing to pay a premium for your TCR-verified sandwich shop. ‘

The last party involved are the sandwich-eaters. They are able to look at the TCR, as they do with Yelp! or and other reviewing entity, and are able to get suggestions for the sandwich shops that they should look for. Sandwich connoisseurs might work their way down the whole list, auditing and verifying each entry, to see which belong, and which might be worth submitting a challenge to. If this Sandwich connoisseur sees a less-than-worthy sandwich shop on the list, they can submit a token-backed challenge to the TCR, in hopes of winning some tokens if the token-holder community agrees with them.

And thus, the loop is complete. Three parties, each with different goals and incentives, are able to create an interdependent loop between them, and creates something that is greater than the sum of the parts.

Incentive Loops: Enabled by Cryptocurrency

The creation of a tokenized incentive loop is made possible due to a number of key features of cryptocurrency.

Smart-Contracts: The integration of Code and Money, smart contracts get to determine how money is operated under certain circumstances (if-then statements). All of the platforms are build in a particular manner so that their native token behaves in particular way, and it is smart contracts that enabled these functions.

Micro-transactions: Many projects are enabled through the power of micro-transactions, which I define as ‘transactions sizes that are too small to be feasibly enabled by Visa or Mastercard”. While business owners are okay with selling you a $1.00 bottle of water, even though it cost them ~0.25 cents to process the transaction, a business model that operates solely in micro-transactions cannot operate where 25% of the income gets sent to a third party.

Cutting out a middleman: Many tokenized projects are simply the same businesses found in legacy systems, but instead of there being a 20–50% cut taken from value creators, the only loss is from the small transaction fee on the network.

Incentive Loops: What Cryptocurrencies are “Backed” by

Many people claim that Bitcoin, Ethereum, and other cryptocurrencies are “magic internet money” that aren’t backed by anything. While, the magic internet money part is 100% true, this article provided (I hope) a sound argument for what is actually propping up the value of these tokens and coins: A positive feedback loop created by aligned incentives.

Positive feedback loops grow exponentially. These loops have the power to bootstrap the adoption of cryptocurrency by the modern person, simply because of the strong pull of incentives that they create.

While some people think that we are 20–30 years out from global adoption, the exponential growth illustrated by positive feedback loops make me far more optimistic.

Lets see how fast the feedback can reverberate!