Active incentive is critical for economic stability: here's where crypto gets it right

People actively make lots of comparisons between crypto’s economic designs and that of traditional markets and one thing that stands out everytime is that traditional markets or economies are rigid, by design and this rigidity keeps the markets at a constant make or break state.

By this, there's the understanding that you either are quick enough to capitalize on something or lose by not doing so, or by staying invested for too long.

Crypto is different because its programmability allows it to be flexible enough to make incentives an active occurrence, meaning that being early or late can matter little as what's most important is actual participation.

In a more digestible sentence, traditional economies lack active incentives as the benefits of being invested is limited to time periods and policies controlled centrally, while crypto economies can enjoy active incentives because the system permits this through its programmable design.

What active incentives look like

First things first, what is incentivization?

Incentivization is the act of providing incentives—rewards, benefits, or motivations—to encourage people to behave in a certain way or take specific actions. — GPT

In traditional economies, the most common reference of incentives we can make would be the interest rates manipulation by central banks, where rate cuts encourage individuals or businesses to take out loans to invest into whatever, the problem however is that rates can be increased and this discourages borrowing activities and that crashes markets.

People have generally always seen that to be normal, but this has always been a reason for instability as we've seen over the years. When the central banking systems increase interest rates, this means that borrowing becomes expensive, and given that these economies primarily function or run on debt, this event directly hurts most in the chain, from companies to consumers.

Rates increases usually are a disincentivization, and this usually leads to market crashes that hurts many across the board.

So what if that didn't need to happen?

That is where active incentives come in. Economies can afford stability if it figures out ways to ensure that everything is made into an opportunity for people to leverage their way up in wealth.

Think of how rate increases increase the cost of borrowing, now imagine that similar events occur on crypto protocols but with built-in incentive structures that encourage individuals to take on these costs regardless.

Why would anything like this be beneficial?

That is a valid question. You see, when you look at it sorely to be applied to something as rate increases in the traditional sense, it is sort of difficult to see the benefits and this is to be expected because crypto protocols don't have central banks, meaning that fixating on the purpose of these interests rate increases would make it difficult to see why incentivizing people to embrace rising borrowing cost would be beneficial.

As such, let's look at it through something that's crypto native.

Crypto Staking!

Usually, crypto protocols offer high interest on staking events at early stages of launch, which often is also the stage where their assets prices peak but on the way down, this interest often lowers.

This is a flawed approach and should be reversed, to which point, their economies would effectively toggle into an active incentivization mode.

How?

You see, if a system pays me 4% APR on staking a specific asset, and said asset generally trends upward, you'll find that at the end of the day, I'd have realized profits much higher than 4% in terms of interest valuation in USD.

Now, if the asset's price were to trend downward, then the interest is expected to increase because this directly encourages people to take on the risk that their capital value may collapse whilst their interest payments grow.

In short:

On the way up, capital appreciation and interest value spikes, both offsetting the disincentivization that would come from rates being low

Then on the way down, capital depreciation is offset by interest rate spikes which increases investors exposure to assets bound to reverse trend at some point because growing interest rates that's sustainable eventually fuels demand, making the capital risk long-term beneficial.

This is the sort of flexibility that's not possible with traditional markets or economies and what's discussed here is merely the most basic application. Active incentives can be built into various protocol designs that it wouldn't matter what price trends native assets are on, the stability of these ecosystems would be assured because market participants are actively incentivized to inject liquidity.

This is how crypto would get it right.

Active incentive is critical for economic stability: here's where crypto gets it right

People actively make lots of comparisons between crypto’s economic designs and that of traditional markets and one thing that stands out everytime is that traditional markets or economies are rigid, by design and this rigidity keeps the markets at a constant make or break state.

By this, there's the understanding that you either are quick enough to capitalize on something or lose by not doing so, or by staying invested for too long.

Crypto is different because its programmability allows it to be flexible enough to make incentives an active occurrence, meaning that being early or late can matter little as what's most important is actual participation.

In a more digestible sentence, traditional economies lack active incentives as the benefits of being invested is limited to time periods and policies controlled centrally, while crypto economies can enjoy active incentives because the system permits this through its programmable design.

What active incentives look like

First things first, what is incentivization?

Incentivization is the act of providing incentives—rewards, benefits, or motivations—to encourage people to behave in a certain way or take specific actions. — GPT

In traditional economies, the most common reference of incentives we can make would be the interest rates manipulation by central banks, where rate cuts encourage individuals or businesses to take out loans to invest into whatever, the problem however is that rates can be increased and this discourages borrowing activities and that crashes markets.

People have generally always seen that to be normal, but this has always been a reason for instability as we've seen over the years. When the central banking systems increase interest rates, this means that borrowing becomes expensive, and given that these economies primarily function or run on debt, this event directly hurts most in the chain, from companies to consumers.

Rates increases usually are a disincentivization, and this usually leads to market crashes that hurts many across the board.

So what if that didn't need to happen?

That is where active incentives come in. Economies can afford stability if it figures out ways to ensure that everything is made into an opportunity for people to leverage their way up in wealth.

Think of how rate increases increase the cost of borrowing, now imagine that similar events occur on crypto protocols but with built-in incentive structures that encourage individuals to take on these costs regardless.

Why would anything like this be beneficial?

That is a valid question. You see, when you look at it sorely to be applied to something as rate increases in the traditional sense, it is sort of difficult to see the benefits and this is to be expected because crypto protocols don't have central banks, meaning that fixating on the purpose of these interests rate increases would make it difficult to see why incentivizing people to embrace rising borrowing cost would be beneficial.

As such, let's look at it through something that's crypto native.

Crypto Staking!

Usually, crypto protocols offer high interest on staking events at early stages of launch, which often is also the stage where their assets prices peak but on the way down, this interest often lowers.

This is a flawed approach and should be reversed, to which point, their economies would effectively toggle into an active incentivization mode.

How?

You see, if a system pays me 4% APR on staking a specific asset, and said asset generally trends upward, you'll find that at the end of the day, I'd have realized profits much higher than 4% in terms of interest valuation in USD.

Now, if the asset's price were to trend downward, then the interest is expected to increase because this directly encourages people to take on the risk that their capital value may collapse whilst their interest payments grow.

In short:

On the way up, capital appreciation and interest value spikes, both offsetting the disincentivization that would come from rates being low

Then on the way down, capital depreciation is offset by interest rate spikes which increases investors exposure to assets bound to reverse trend at some point because growing interest rates that's sustainable eventually fuels demand, making the capital risk long-term beneficial.

This is the sort of flexibility that's not possible with traditional markets or economies and what's discussed here is merely the most basic application. Active incentives can be built into various protocol designs that it wouldn't matter what price trends native assets are on, the stability of these ecosystems would be assured because market participants are actively incentivized to inject liquidity.

This is how crypto would get it right.

Posted Using INLEO