It’s about more than money #1
You probably know I read a lot of books. 📚
You might also know that I’m hosting Twitter Spaces and writing blog posts like these. The other day, someone asked me so, “Why are you hosting these spaces without getting paid for it?”
I do many things that I do not have a financial incentive to do. I read a lot, and I attempt to learn front-end development. I am playing around with generative AI for image generation. I hold the door open for other people and watch a lot of anime.
It gets worse; I spend money on some of these things.
As someone working in crypto, a lot of conversations are around financial incentives. They try to sell you on staking rewards, the latest memecoin that’ll 100x, or the yield farming.
I understand. It just doesn’t work for me.
Instead, I find myself writing recap threads for Twitter spaces that no one asked me for and spending time whipping up enemy designs for the galverse anime.
You know what I get for latter? A sticker on my Gal ID card. Surely it isn’t rational to spend hours on it. But neither are humans.
Sometimes people convince me that some coin will moon and I’ll buy it, and then cause I’m probably an idiot, I don’t check again nor cash out. I’m a lost cause.
Maybe the incentives are just wrong for me. And I don’t think I’m that special, so it might be that the lack of incentives beyond financial is currently holding back web3.
What if we looked at incentives, motivation, and behavior more holistically in web3?
I know it’s crazy that “to-earn” just won’t do it for some people. But let’s start with the basics.
What are incentives?
Incentives are simply something that motivates you to do something.
Incentives can be positive or negative. A positive incentive, for example, is getting a raise, whereas negative incentives are bad for you, like a pay cut or even losing your job.
Financial incentives are the most common type in crypto, whereas non-financial incentives include appreciation, competition, responsibility, the opportunity to progress, and being part of decision-making.
In economics, the idea is that we’ll always act in a way to improve our economic standing, therefore, respond to incentives. Economists also like to call that picking what has the most utility.
High incentives will lead to high performance, and low incentives to lower effort.
We all know the world doesn’t work like economics predicts it to.
Why incentives matter?
Incentive matter because they encourage positive outcomes and can help individuals develop and grow in the way they want to. Incentives can serve as a nudge to help us move in the right direction. (for more on Nudges, read Nudge ;)) They can also reduce inefficiencies.
And in crypto, incentives are proposed as a primary way to bootstrap networks and overcome the cold start problem that anything with a network effect faces. Network effects mean your product becomes more valuable to users, but when no one is there, there is little utility.
Tokens can solve that, at least according to Chris Dixon (a16z)
Early on during the bootstrapping phase when network effects haven’t kicked in, provide users with financial utility via token rewards to make up for the lack of native utility.
But I digress.
Even if it seems straightforward, incentives don’t always work as you want. Especially when it comes to money.
What could go wrong?
Crowding out
Monetary incentives can have two effects. Most obviously, they make a certain behavior more attractive.
If your housing association now offers you money to keep your garden clean, sure, it’ll be more “worth” your time.
But there is also an indirect psychological effect.
Maybe you kept your garden clean anyway because you enjoyed it, or you simply are a bit of a clean freak like Levi.
There’s a slight shift however in perception when it’s suddenly being paid for. Maybe now it’ll look more like you want to receive the money. Sure, it’s subtle, but for some people, this shift in image can make all the difference.
Incentives always signal something and a lot comes down to how the person being incentivized perceives it. To provide a different example, if you offer a kid a lot of money to do better in school, you might at the same time hint that:
- it’s a very hard goal to achieve
- the kid isn’t well suited for it and requires this extra push
- there is no intrinsic motivation, to begin with.
If the kid now feels that it’s not suited for it, instead of challenging themselves, they might just give up. You’ve successfully crowded out any intrinsic motivation that it might have had.
Another example where the monetary incentive conveys negative information would be offering people money to live near a nuclear waste site. Sure, you offer people money, and technically, the risks of being radiated are minimal, but you’re also telling them that otherwise, no one would live there voluntarily.
When it comes to social settings, introducing monetary incentives can badly hurt social contracts.
An example that Uri Gneezy brings up frequently (also in the book Why Axis, definitely a read that inspired this post) is a daycare in Israel. To prevent parents from picking up their kids late, they imposed a $3 fine.
It didn’t work as planned. The price was less than a basic coffee at Starbucks. Instead of picking their kids up on time, the daycare had put a price on being late, which entirely removed the notion of a social contract that states you should pick up your kid on time for everyone’s sake.
$3 for a little more daycare seemed a good deal. Many parents started being late because when there is a price for it, it becomes acceptable. When the daycare realized its mistake, it was too late. Removing the fine didn’t revert late pickup numbers to the previous levels.
What we can learn from this? Treat monetary incentives in the social context with care. If you're on a date, it’s going great, and you would love to move on to an after-dinner drink, you’d also not pull out your wallet to “incentivize” your company to join you. It’ll likely ruin the entire date and leave a bad aftertaste.
Unless, of course, you’re aiming for a relationship like Conner Roy in Succession. In case you haven’t watched, he’s basically paying his girlfriend to be with him. He’s also one of the most tragic characters of the series. Still, he got some banger lines.
Crowding out can especially happen when you start with an incentive and then remove it later on. For example, when they started paying people for blood donations, and eventually the system changed, and they didn’t anymore, donations too would not be restored to previous levels.
Nevertheless, crowding out doesn’t always happen. In some cases, when people need a little nudge to get over their laziness or small friction points, incentives can work even when removed afterward. The thing that matters then is if the rewards from the behavior itself are bigger than the incentive.
For instance, Gary Charness and Uri Gneezy tested incentives to get students to exercise, which concluded that rewards contributed to participants in the study forming healthy rewards. It’s implied that they probably realized how much better they felt and decided it was worth keeping the exercise up even if not rewarded for it.
Crumble trust relationships
As mentioned above, offering dates to pay for their time probably ruins whatever could have developed. It can also ruin trust relationships in other situations. Imagine you want someone to keep a secret for you, and then you offer to pay them for it. IDK about you, but I’d probably feel as if the other person doesn’t trust me.
Armin Falk and Michael Kosfeld investigated this effect in a study called fittingly “Distrust,” which was focused on looking at incentives in an employment context. They concluded that “explicit incentives can entail hidden costs,” meaning that, for example, elements in an employment contract that signal distrust may do more harm than good.
They examined that through a game in which agents had to distribute money. A principal (decision maker) could either give them a free hand or limit their choices from the start. It turned out that agents performed well voluntarily when no restrictions were imposed, whereas principals limiting their choices had the opposite effect.
Maybe trust more, not less, if you’re an employer. (Also, pretty much every book on good leadership these days).
I realize this post is getting long, so I’ll keep my thoughts on incentives in web3 for part two.
If anything, I want to encourage people to think about incentives more broadly. I’m not saying monetary incentives don’t work. They do. Sometimes as intended, sometimes not.
The utility we seek isn’t just increasing the money in our bank. It can also be simple enjoyment of an activity for its own sake or maybe have a beneficial impact on the image we have of ourselves and as perceived by others.
Incentives work differently in different settings and also for different people. What motivates us is impacted by life experience and culture.
Not everyone is motivated by “to earn [magic internet coin]”, and often it seems the people behind the mechanism spent less time trying to understand real humans’ motivation to do things than crafting ponzinomics and coming up with “burns” to make it seem like token price would go up. That’s what annoys me. I am pretty sure it contributes to our [crypto’s] bad public image.
And have you ever considered that we might have exhausted the people we could attract by promising easy gains?
Maybe, and just maybe, if we truly want to gain mass adoption, we should look at human behavior and motivation more holistically.
In the end, wouldn’t that mean we’d fully respect and acknowledge all the different motivations people have?
In that spirit, I’ll totally financially unincentivized now go play some guitar.
If you, too, do a lot of things that don’t pay off directly and you do them because you enjoy them, keep going.
We should all maintain some hobbies that keep us from spending too much time in the crypto bubble.
So long,
Nao
