We looked at the root meaning of the word “token” and concluded that tokens are tools which transmit factual information intended to teach. The word “incentive” has a similarly interesting etymology, coming from the Latin incantare, which means “to chant or charm”, and the Latin adjective incentivus, which means "setting the tune".

We've already referenced a poetic translation of Chapter Seventeen of the Tao te Ching:

When the work's done right,
with no fuss or boasting,
ordinary people say,
Oh, we did it.

Ursula le Guin explains her choice of words here as follows:

Here, it becomes clear what incentives really are. Incentives set our shared tunes, as if by charm or incantation. They are the key to which our voices gravitate, the unseen flows which shape our collective behaviour. If the key is a harmonious one, that's wonderful, but there are as many examples of perverse incentives in our history as there are of wholesome ones.

What follows is not intended as a definitive statement about which kinds of incentives fall into the above categories. That’s not how we think at Kernel. Rather, we will explore how making public and verifiable the way incentives are structured can enable us to create more wholesome structures together. Public, verifiable , and intentional incentives can arise from and perpetuate diverse ways of being and creating. It’s up to us to figure out how to implement and enshrine unity in diversity.

What constitutes persuasive language? Words which perform what they say. If an essay about humour is itself funny, then that essay is more likely to convince you about what humour is.

What happens when your code says, "Transfer 50 DAI to Alice" and executes the transfer of value simultaneously? Well, you can build really persuasive incentives for any kind of economic behaviour. How do we know what behaviour we should incentivize though?

Ben Edgington persuasively defines what crypto-economic systems are:

Basically, we want nothing bad to ever happen (security) and something good to happen eventually (availability). We have three tools to help us:

1. rewards for behaviour that helps the protocol,
2. penalties for behaviour that hinders the protocol, and
3. punishments for behaviour that looks like an attack on the protocol.

Ben describes how these incentives may be applied in Ethereum 2.0. We wish to emphasise that this three-pronged scheme can be used to generate a great deal more economic nuance than "win/loss". Ethereum 2.0 is a living example of a protocol which acknowledges much of the nuance around participation: very often you may be at odds with the majority, but by being aware of this and designing for it, we can make space for it and create novel economic mechanisms (like the "inactivity leak") which solve for our security needs.

This line of thinking builds on what Andy Matuschak and Michael Nielsen described as a "new kind of economic essay" that was programmed by Peter Norvig. In a few lines of Python, Norvig proves a surprising result about wealth inequality. The long-term distribution of wealth is primarily defined by the nature of the transactions. It's not the initial distribution of wealth or geographic distribution of agents that counts, it's whether there are transactions which are not only win/loss. It's whether there is nuance, space for generative collaboration, "good" credit (i.e. credit used to create rather than only consume), and win/win interactions.

Wealth inequality has to do primarily with the nature of the economic protocols we use to create and distribute value. This doesn't mean we can turn a blind eye to historic injustice, but it does suggest that there are ways of solving problems of inequality that focus more on the process and less on specific amounts distributed at specific times to specific groups (although that may be an additional and effective short-term solution for reasons of psychology, social cohesion or other factors not considered in Norvig's essay).

The larger point is this: if you disagree that the initial distribution of wealth doesn't affect long-run wealth inequality, you can try to find a counterexample: an initial distribution which does affect inequality. You can experiment by making modifications to a few lines of code, trying to find instances where the initial distribution matters. No matter whether you succeed or fail, you will build a better understanding of the problem.

Used well, Jupyter notebooks can be environments for transformative thought. They're a new media form, with different possibilities from either essays or code. And that's just a notebook, let alone a smart contract. Smart contracts deployed on a shared, global network not only demonstrate new economic insights and ideas, they implement them. We can even design consensus protocols, within which smart contracts live, which respond to the nature and extent of our participation (in terms of penalties, rewards and inactivity leaks, but also in terms of the monetary policy of the network: high activity on Ethereum means a deflationary supply, as more fees get burnt than validator rewards get minted, whereas low activity results in n inflationary supply).

Ethereum 2.0 is an example of an intentionally crafted shared environment, which quantifies what is "correct" in a given context, ensuring it where possible and incentivising it where we cannot be certain. The awareness, both what is shared and of that which we cannot ensure or be certain of, returns us to the kind of humility for which Kernel advocates, which is not the superficial humility of seeming small and lowly.

We’ve said before that humility is the ground of reverence, because it means to see others as uniquely themselves and yet no different from you. You both know what is correct, and yet can never be certain that what is correct for you is correct for any other person, who is at once both the same as you and different from you. Humble participants engage whole-heartedly in this singular life, branching up and out to hold more light so that they can cycle more nutrients through our shared roots. Humility of this kind moves us progressively closer to realising the ideal of unity in diversity.

You must think like an engineer about the economic games your contracts incentivize, and the incentives on which your protocol relies. Ironically, the best place to go looking for clear thinking and research in this domain is neither economics, nor psychology. It is computer game design.

The reason for this is that contractual economic code on a shared, public ledger programs crowd behaviour. Don't get too excited by this, for with great power comes great responsibility - which is why the thinking patterns we outlined at the start of these modules have fundamentally to do with humility. You cannot, as an individual, know what the second and third order effects of such code will be. But you can be deeply aware that such effects exist, and you can use your awareness to inform the intention with which you write and deploy contracts.

Such intention is deeply linked to your purpose: it is no coincidence that many educators use the term "purpose-driven tokens". The purpose we can imbue our mechanisms with include reaching consensus on a network's state, contributing to lists, contributing to social media in various ways, and making it more expensive to pollute.

This last point is most illustrative: simply buying carbon credits does not directly contribute to reducing emissions. However, it does drive the price of carbon credits up, which makes it more expensive for companies who pollute to offset such behaviour. Mechanisms are not only about whom we reward and how: we only favour that way of thinking due to the way incentives are programmed in Proof of Work blockchains, and because rewards are easier to market to the masses. When, instead, we realise that tokens are only scarce if we design them to be that way, then we can begin thinking more creatively about the sorts of cost models so critical to censorship resistance on credibly neutral networks and the kinds of balanced, collective incentive structures that can keep public goods both good and truly public.

This more balanced and integral approach leads us further into software as service. When you really serve others with purpose, the distinction between "them" and "me" begins to dissolve. In truth, there never was any resolution to be had, no final conclusion to come to after which all things will be “right” in the world. There is just this dissolution in the homeward-flowing tide.