There are different blockchain and crypto-systems out in the market. Some experts refer to it as Cryptoeconomics. The industry started with Bitcoin (BTC), the most important virtual currency in the world. After it, more than a thousand other projects appeared, creating a new and unique ecosystem.

Cryptography is the backbone if this industry. And it is used in many different ways, applying different economic principles to encourage actors and players to participate in some networks.

Ethereum’s co-founder, Vitalik Buterin, calls these principles ‘economic incentives’ that are defined inside the system. Indeed, they encourage some properties to hold into the future.

There are four different forms of incentives: tokens, privileges, rewards and penalties. They all work in different ways and play important roles in the crypto world.

The first category we will write about is ‘tokens.’ There are many different cryptocurrencies available, some of them are used as a medium of exchange, and some others are used as a store of value. But there is another way to use virtual currencies, we are talking about tokens.

In general, these tokens are used as an incentive method to attract users to the platform. Bitcoin uses a proof-of-work (PoW) mechanism that performs different actions.

The first transaction in each of the blocks on the Bitcoin’s blockchain, starts a new coin that is owned by the creator of the block. Nodes have a clear incentive to support the network and provide a different way to distribute coins into circulation. This works in this way, in part because there is no central authority to issue them.

“The steady addition of a constant of amount of new coins is analogous to gold miners expending resources to add gold to circulation. In our case, it is CPU time and electricity that is expended.”

This specific token incentive is known as block reward, which many different virtual currencies have, such as Litecoin (LTC) or Bitcoin Cash (BCH).

The block reward in Bitcoin’s protocol will be decreasing every 210,000 mined blocks. When Bitcoin was created, each of the blocks produced gave 50 coins as a reward to the miner. Now, the number of coins per block has been reduced to 12.5 units. Furthermore, the mining difficulty has substantially increased in the last years.

The second category is related to privileges. Mr. Buterin defines this as a way to ‘incentivize actors giving them decision-making rights’ used to extract a rent. Bitcoin can work as a good example. Actors that work as miners should keep the fees levied on each transaction.

In the future, as the network evolves, users could entirely rely on transaction fees and the system become inflation free. This would ultimately happen to Bitcoin in the future.

Users will have to add a fee to the transaction they perform. Miners can pick transactions that have the highest fees. At the end of 2017 and the beginning of 2018, the Bitcoin network was so congested that miners were only processing transactions with the highest fees. Thus, users that wanted to send some funds had to pay very expensive fees to do it.

The third category we will write about is related to rewards. This can be a very useful tool to encourage actors behave properly. Some of the privileges we can mention are related to monetary benefits. Another way for users to be rewarded is by doing something positive for the network.

Steemit, for example, is a great platform that uses a reward system for users that create great content. The model used by the platform is called ‘proof-of-brain,’ allowing users to be rewarded every time the upload good-quality content. Moreover, if users are upvoted, they receive even more earnings with a native token.

Furthermore, actors that participate during long periods of time, receive an increased reputation. That means that publishers can earn even more money if they contribute to the good of the network.

The last topic we will mention in the article is related to the penalties users have in certain networks. Penalties are tools used to punish those actors with a bad and negative behavior. Each network uses a different way to penalize users that do not use the network in the correct way.

In the Bitcoin network, if there is a participant that wants to act dishonestly, then the network would discard the block and revert to the longest chain available.

There are other consensus mechanisms such as Proof-of-Stake (PoS). In PoS, it is even possible to confiscate or remove the bad actors on the network.

In general, networks use different incentives to have a strong and good network.

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