TD₿: Bitcoin’s Incentive Scheme and the Rational Individual by Hugo Nguyen
TL;DR Bitcoin’s incentive scheme relies on the assumption that people are rational actors.
Hey Bitcoiners,
An essential component of how Bitcoin properly functions is the incentives that align every participant in the system. Every actor — the miners, the nodes, and users — is incentivized to adhere to the protocol’s rules.
Underlying these incentives is the belief that every individual can be considered an economically-rational person. When presented with a choice, a person will choose the option that benefits them the most.
You would expect a rational person to choose to store their wealth in the scarcest asset — this is the main financial incentive of Bitcoin. As demand increases, a rational individual would expect Bitcoin’s price to increase too because they understand its fixed supply.
An individual can trust that this 21 million hard-capped supply won’t be changed because Bitcoin is 1) Decentralized and difficult to change, and 2) Network participants would not rationally agree to dilute their own money. They are incentivized to maintain the fixed supply at 21 million.
This is the opposite of the fiat system we have today, where we don’t know how many dollars there will be today, tomorrow, or next year. This is why the dollar must rely on coercion to force people to hold dollars, while Bitcoin relies on incentives to entice individuals to opt-in voluntarily.
Hugo Nguyen argues in this blog post that Bitcoin’s underlying incentives are crucial to how the system works (12/24/2018).
Today, there is still information asymmetry around Bitcoin and its incentives. But as more people learn about what it is, one can expect these individuals to act rationally and choose to store their wealth in this immutable, scarce asset.
Tick tock next block,
Cory Klippsten
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Quote of the Day
“Unlike Bitcoin, no physical form of money could possibly guarantee a permanently fixed supply—so far as we know, absolute scarcity can only be digital.” - Robert Breedlove, Host of the What is Money? Show
Job of the Day
Blockstream is building solutions on Bitcoin that will disrupt the existing financial system, and it needs a Product Manager to help them on its mission. This is an opportunity to work with an amazing team while helping push Bitcoin’s adoption.
Not your particular skillset? Check out all the Bitcoin jobs at bitcoinerjobs.com.
Event of the Day
The Bitcoiners in Minneapolis Meetup is happening tonight at 6 PM! You’re not going to want to miss this one. Word on the street is some great Bitcoiners will be in attendance tonight👇
Not in town for this? Check out all the Bitcoin events at bitcoinerevents.com.
Meme of the Day
Stackchain is coming for all of your incentives.