“Incentivization is defined as the practice of building incentives into an arrangement or system in order to motivate the actors within it”
Incentive can cause people to perform or change a certain behavior that they wouldn’t otherwise.
The most recent examples, that comes on top of my mind is my utility service provider offering discount on the bill if the customers makes a digital payment. Thus, incorporating change in customer behavior which also reduces the cost of handling the transaction.
A discount offered in bill by the mobile service provider if you opt for E-Bill. Thus, incorporating change in customer behavior which reduces the environment foot-print
Coming to block-chain and why do they need incentivization as design element:
A blockchain is a decentralized digital ledger that keeps track of a record of ownership without the need for a designated third party to update and enforce changes to the record.
The updating of the ledger is done directly by the users of the blockchain and is traditionally governed by a proof-of-work (PoW) protocol.
This is in contrast to a centralized system, where a trusted third party validates the transactions.
The key paradigm in block-chain is that it eliminates the need for a trusted third party (i.e. an intermediary e.g a bank, clearing house) in a transaction.
In order to achieve this in a decentralized network, the system needs to ensure that when new transactions are incorporated into the blockchain, a common consensus about the new update is agreed upon among all users. To reach such a consensus in a decentralized setting, miners are asked to compete for the right to append a new block to the chain
Satoshi Nakamoto used incentive design to achieve a secure, decentralized digital currency.
The behavior that is being incentivised for a bitcoin miner to align it with security of network has following attributes:
a. Choose a subset of the outstanding transactions that it knows about(e.g., the ones with the highest transaction fees),
b. All the transactions in the block should be valid transactions i.e. they should be unspent.
c. The unlocking scripts for the input txn should provide solution to locking scripts of output txns.
d. Provide solution to the proof of work
The incentive that a miner gets for adding a new (valid) block to the blockchain has two components:
1. A flat reward that does not depend on the contents of the block.
2. The sum of the transaction fees of the transactions in the block.
Let us also look at how incentivization is being designed in non-currency block-chain use cases:
1. Steemit Block Chain:
Steemit represents a blogging platform built on top of the Steem blockchain.
It incentivises the creation of new content by rewarding the best content creators with Steem.
It is a decentralized video streaming platform which incentives the video content publishers