Principle 3 Value as Incentive

Summary

This video script explores the third design principle of blockchain: value as an incentive. It explains how blockchain aligns incentives of stakeholders using tokens like Bitcoin, promoting behaviors that benefit the network and build reputation. Satoshi Nakamoto's programming rewards self-interested actions that protect and develop the blockchain, countering destructive incentive systems of the past. The script also touches on Bitcoin's monetary policy, capped at 21 million, and the potential for new financial instruments and applications in virtual worlds, emphasizing the implications of financial incentives for collaboration and innovation.

Takeaways

• 🔒 Blockchain uses a token of value, like Bitcoin, to incentivize behaviors that benefit the network and build a person's reputation.
• 💡 The alignment of incentives in blockchain systems contrasts with traditional internet structures where power is concentrated in large corporations.
• 🏦 The 2008 financial crisis highlighted the negative consequences of incentive systems that reward short-term thinking and risk-taking in large banks.
• 🛡️ Blockchain technology addresses issues like Sybil attacks by making it economically unattractive to create multiple identities, thus maintaining network trust.
• 💰 Satoshi Nakamoto's protocol rewards miners with Bitcoins for creating blocks, which also serves as a disincentive for bad behavior as miners are invested in the network's success.
• 📉 The Bitcoin reward for mining blocks halves every four years, which has been effective in rewarding early adopters and maintaining the integrity of the blockchain.
• 🤝 The self-interest of miners in choosing the longest chain to mine on helps to solidify the blockchain and keep the network in consensus.
• 🆔 On the blockchain, a person's identity is inherent and recorded with their actions, which is a departure from traditional forms of identity verification.
• 💼 The Bitcoin blockchain's monetary policy is hard-coded into the software, capping the supply at 21 million, which helps protect against inflation and currency devaluation.
• 🌐 The blockchain opens up possibilities for new financial instruments and applications, including those for virtual worlds and smart contracts.
• 💼 The divisibility of Bitcoin to eight decimal places enables micropayments and smart contracts, which are particularly useful for the Internet of Things.

Q & A

What is the third design principle of blockchain technology discussed in the script?

The third design principle discussed is 'value as an incentive,' which means that blockchain aligns the incentives of all stakeholders and uses a token of value to promote behavior that benefits the entire system.

How does blockchain technology align incentives to promote good behavior?

Blockchain technology uses a token of value to incentivize behavior that benefits the network as a whole, and it builds a person's reputation within the system. This incentivization encourages participants to act in ways that maintain the health and integrity of the blockchain.

What problem does the value incentive system solve that was prevalent in the early internet era?

The value incentive system solves the problem of a destructive incentive system where power was concentrated in large corporations and banks, leading to behaviors like predatory lending and exploitation of user data, which contributed to the 2008 financial crisis.

How did Satoshi Nakamoto program the blockchain to reward people who work on it and use its tokens?

Satoshi Nakamoto programmed the blockchain to reward participants with Bitcoins for their contributions, such as mining new blocks. This reward system encourages participants to act in their self-interest, which in turn benefits the blockchain network.

What is a Sybil attack, and how does the blockchain design address it?

A Sybil attack is when a node forges multiple identities to seem like different people, undermining the trust in a peer-to-peer network. The blockchain design addresses this by making it economically unbeneficial to acquire extra identities through its consensus mechanism and token rewards.

How does the blockchain protocol reward early adopters and miners?

The protocol rewards early adopters and miners with a set quantity of Bitcoins for mining new blocks. Initially, miners received 50 Bitcoins per block, and this reward has halved every four years, incentivizing miners to invest in the platform's success.

What is the significance of the longest chain in the blockchain network?

The longest chain represents the greatest amount of work and is considered canonical by the network participants. This consensus on the longest chain solidifies the blockchain and ensures that all participants are on the same page.

How does the blockchain technology leverage a person's reputation online?

Blockchain technology allows a person's identity to be inherent and recorded with their actions. This means that a person's reputation is built and can be leveraged within the blockchain network, providing a new dimension of trust and accountability.

What is the monetary policy programmed into the Bitcoin blockchain, and why is it important?

The Bitcoin blockchain has a monetary policy that caps the supply of Bitcoins at 21 million, to be issued over time. This policy is important as it makes the currency more secure, immune to counterfeiting and theft, and resists inflation, providing a stable store of value.

How does the divisibility of Bitcoin facilitate transactions in the internet of things?

Each Bitcoin is divisible to eight decimal places, allowing users to combine and split value over time in a single transaction. This divisibility enables the setup of smart contracts for micropayments, which is ideal for the internet of things where devices need to exchange information and perform transactions.

What are the implications of using value as an incentive in blockchain for collaboration and innovation?

Using value as an incentive in blockchain provides financial motivation for effective collaboration and the creation of new services and products. It also means that a person's reputation becomes valuable and trackable, potentially reducing bad behavior and encouraging positive contributions to various fields, including sustainable energy and open-source software development.

Outlines

00:00

💰 Value as Incentive in Blockchain Design

The third principle of blockchain design is the use of value as an incentive mechanism. This principle aligns the interests of all stakeholders, encouraging behaviors that benefit the blockchain ecosystem through the use of tokens like Bitcoin. Satoshi Nakamoto's software rewards participants for contributing to the network, which also enhances their reputation. The system addresses the issue of destructive incentive structures prevalent in traditional internet and financial systems, exemplified by the 2008 financial crisis. Blockchain combats issues like Sybil attacks by making it economically unviable to create multiple identities. The consensus mechanism and Bitcoin rewards compel participants to act with integrity, ensuring the long-term success of the platform. Miners, for instance, are incentivized to invest in the best equipment and maintain the ledger, as they own and are invested in the success of Bitcoin.

05:01

🔒 Reputation and Security in Blockchain Systems

This paragraph delves into the importance of reputation and security in blockchain technologies. Unlike traditional systems, blockchain allows for the leveraging of one's reputation online, with identities and actions inherently recorded on the blockchain. The Bitcoin blockchain, in particular, is designed to preserve value by incorporating a fixed monetary policy into its software, capping the total supply of Bitcoins at 21 million to prevent inflation and ensure security against counterfeiting and theft. The divisibility of Bitcoin to eight decimal places enables the creation of smart contracts for micropayments, which is particularly useful for the Internet of Things. The implications of using value as an incentive in blockchain are profound, fostering financial incentives for collaboration and the creation of new financial instruments and applications. This could lead to innovative solutions such as real-time payments for sustainable energy generation and contributions to open-source software projects.

Keywords

💡Blockchain

Blockchain is a decentralized digital ledger that records transactions across multiple computers in a way that ensures the integrity and transparency of the data. It is the underlying technology for cryptocurrencies like Bitcoin. In the video, blockchain is discussed as a system that aligns incentives of all stakeholders and promotes behavior beneficial to the network as a whole.

💡Value Incentive

A value incentive in the context of blockchain refers to the use of a token of value, such as Bitcoin, to encourage behaviors that benefit the blockchain network. The video explains how this principle is used to ensure that participants in the network are rewarded for actions that contribute positively to the system.

💡Token

In blockchain technology, a token represents a digital asset that can have various uses, such as a means of exchange, a unit of account, or a store of value. The script mentions tokens like Bitcoin, which are used to incentivize and reward participants for their contributions to the blockchain network.

💡Reputation

Reputation in the video refers to the standing or esteem of a participant within the blockchain community, which is built through their actions and contributions. It is a key concept because it shows how blockchain can establish trust and credibility in a decentralized environment.

💡Satoshi Nakamoto

Satoshi Nakamoto is the pseudonym used by the unknown person or group who created Bitcoin and its underlying blockchain technology. The script credits Nakamoto with programming the software to reward individuals for their work and use of the blockchain, aligning self-interest with the network's health.

💡Destructive Incentive System

The term refers to incentive systems that encourage harmful behaviors, such as those that led to the 2008 financial crisis. The video contrasts this with the constructive incentives of blockchain, which promote behaviors that are beneficial to the network.

💡Sybil Attack

A Sybil attack is an attempt to subvert a peer-to-peer network by creating multiple identities to gain a disproportionate amount of influence. The script explains how Satoshi Nakamoto's design of the blockchain mitigates this by making it economically unattractive to create extra identities.

💡Consensus Mechanism

A consensus mechanism is the process by which a blockchain network achieves agreement on the current state of the ledger. The script describes how the resource requirements of the consensus mechanism, combined with Bitcoin rewards, compel participants to act with integrity.

💡Mining

Mining in the context of blockchain refers to the process of validating transactions and adding them to the blockchain. Miners are rewarded with Bitcoin for their efforts, as mentioned in the script, which also discusses the halving of mining rewards every four years.

💡Smart Contracts

Smart contracts are self-executing contracts with the terms of the agreement directly written into code. The video mentions smart contracts as a way to enable micropayments and automated transactions, which are particularly useful in the context of the Internet of Things.

💡Divisibility

Divisibility refers to the ability of a currency or asset to be divided into smaller units. The script points out that each Bitcoin is divisible to eight decimal places, allowing for flexible transactions and the possibility of micropayments.

💡Cryptocurrency

Cryptocurrency is a digital or virtual currency that uses cryptography for security and operates independently of a central authority. The video discusses Bitcoin as an example of a cryptocurrency and its role in incentivizing and rewarding blockchain network participants.

💡Inflation

Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. The script explains how Bitcoin's capped supply at 21 million is designed to resist inflation and currency devaluation.

Highlights

The third principle of blockchain is value as an incentive, aligning the incentives of all stakeholders.

Blockchain uses a token of value like Bitcoin to promote behavior that benefits the network and builds reputation.

Satoshi Nakamoto programmed the software to reward people who work on and use the blockchain's tokens.

Destructive incentive systems in the early internet era led to corporations extracting value and risky behaviors.

Large banks' leadership was rewarded for risk-taking and short-term thinking, leading to the 2008 financial crisis.

Blockchain incentivizes good behavior by harnessing self-interest to build and protect the system.

Civil attacks, where a node forges multiple identities, are defended against by making extra identities economically unbeneficial.

The resource requirements and Bitcoin rewards compel participants to act with integrity.

Miners are rewarded with Bitcoins for creating blocks, with the reward halving every four years.

Miners are invested in the platform's success, leading to better equipment and efficient energy use.

Bitcoins represent partial ownership of the blockchain and finance its development.

Miners choosing the longest chain solidifies the blockchain and maintains consensus.

Blockchain technology allows leveraging the value of one's reputation online.

The Bitcoin blockchain preserves value by programming its monetary policy into the software.

The capped supply of 21 million Bitcoins guards against hyperinflation and currency devaluation.

Blockchain enables trading of various assets, including new financial instruments and virtual world applications.

Each Bitcoin is divisible to eight decimal places, allowing for smart contracts and micropayments.

The implications of using value as an incentive include financial collaboration, reputation tracking, and innovative applications.

Transcripts

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[Music]

in these lessons we're looking at the

seven design principles underlying

blockchain our third principle is value

as an incentive

what does this mean well the way

blockchain is set up it aligns the

incentives of all stakeholders it uses a

token of value like a Bitcoin to promote

Behavior benefiting the blockchain as a

whole

the behavior also builds a person's

reputation

Satoshi Nakamoto programmed the software

to reward people who work on it and use

its tokens

when everyone has a stake in the network

people make sure that it stays healthy

problem this solves is a destructive

incentive system in the first air of the

internet power was concentrated in large

corporations they could extract enormous

value from the system making them more

powerful still large Banks nearly broke

the financial system because their

leadership was rewarded for risk taking

and short-term thinking remembered 2008

that's how the incentives were set up

the quarterly report was King this

caused a host of bad behaviors including

predatory loans targeting the poor

likewise

large.coms pretended to offer something

for nothing

they advertised free services and Retail

search social media and the real unseen

cost was user data which they exploited

to boost revenues

but whenever these firms get hacked

consumers are left to deal with the

stolen credit card and their bank

account information the blockchain

Breakthrough is in using programming to

incentivize good behavior Satoshi

recognized that people act in their own

self-interest so he needed to harness

that self-interest to build and protect

the blockchain

one of the things he had to defend

against was the so-called civil attack

that's when a node forges multiple

identities making one person seem like a

bunch of different people

this makes the peer-to-peer Network less

trustworthy you don't know whether

you're dealing with three parties or one

party using three identities

on the other side of things it also

makes it much harder to prove you are

who you say you are to fight civil

attacks Satoshi didn't make it

impossible to acquire extra identities

instead he made it so that there was no

benefit in doing so he programmed the

source code so that no matter how

selfishly people acted their actions

benefited the system

the resource requirements of the

consensus mechanism combined with

Bitcoins as a reward compel participants

to do the right thing to act with

integrity

civil attacks no longer make economic

sense when minors create a block and

Link it to the previous one The Miner

who completes the blog first gets a set

quantity of Bitcoins for their efforts

satoshi's protocol rewarded early

adopters handsomely with Bitcoins for

the first four years miners received 50

Bitcoins for each block

every four years the reward per block

has halved 25 Bitcoins

12.5 Bitcoins and so on

and because they now own Bitcoins the

miners are invested in the platform's

long-term success

so they buy the best equipment to run

mining operations spend energy as

efficiently as possible and maintain The

Ledger

Bitcoins also represent partial

ownership of the blockchain itself it's

not just incentive to mine and transact

with others by owning and using Bitcoin

participants are financing the

blockchain's development here's an

example of how making a selfish Choice

benefits the network and it involves

miners every so often different miners

find two equally valid blocks of equal

height

this means the rest of the miners need

to choose which block to build on next

they generally pick whichever they think

will win rather than building on both

otherwise they'd have to split their

processing power and all the electricity

they're providing between these Forks

well that's a losing strategy

the longest chain represents the

greatest amount of work so participants

choose it

as Canon this solidifies the blockchain

and keeps everybody on the same page all

because every Miner wants to back the

right horse

by acting in their own self-interest

miners serve the peer-to-peer Network

and that affects their reputation

before blockchain Technologies people

couldn't easily leverage the value of

their reputation online even offline our

identities are multi-faceted and our

reputations are different among

different groups we keep documents to

prove our ID like passports and and a

driver's license

but on the blockchain your identity is

inherent and recorded with your actions

the Bitcoin blockchain also preserves

value by programming its monetary policy

right into the software

this means the currency is more secure

not only is it immune to counterfeiting

and Theft

but it also resists inflation Satoshi

capped the supply of Bitcoins at 21

million to be issued over time

the current rate of mining is six blocks

per hour

since the amount of Bitcoins awarded for

mining a block is halved every four

years those 21 million Bitcoins should

all be in circulation around the year

2140.

this should guard against hyperinflation

and currency devaluation and currencies

are not the only asset we can trade on a

blockchain the sky's the limit really

new financial instruments are possible

from proof of asset authenticity to

proof of property ownership

there might also be blockchain and

Bitcoin applications for Virtual Worlds

such as the ones described in books like

Neil Stevenson's snow crash or Ernest

Klein's Ready Player One

unlike fiat currency each Bitcoin is

divisible to eight decimal places

and this lets users combine and split

value

over time in a single transaction

that means that users can set up smart

contracts to measure the use of a

service and eke out tiny fractions of

payments or micro payments

that kind of metering is great for the

internet of things when the physical

world becomes smart and starts

exchanging information and doing

transactions so what are the

implications of using value as an

incentive

with blockchain people have a financial

incentives to collaborate effectively

and to create just about anything

if your reputation is valuable and

trackable online discussion groups won't

be inundated with trolls bad behavior

will cost too much

homeowners could receive real-time

payments for using solar panels to

generate sustainable energy for the

network

software developers on open source

projects could pay contributors for

acceptable code

imagine all that and more