How Crypto Incentives Work, Explained

They promote a sense of community and inclusion within a platform.

Cutting out the middlemen has tumbled fees, and many startups are using this to their advantage. In addition to cheaper services compared with their mainstream rivals, they are luring in users through revenue-sharing schemes that give everyone a slice of the profits. This encourages loyalty to a platform and drives participation. Miners and validators — the people who make transactions run smoothly on the blockchain — are also getting rewarded through the contributions they make to a network, and crypto enthusiasts with expertise are being incentivized to uncover security flaws through bounties or to embrace new coins through airdrops.

Blockchain platforms are also helping brands connect with consumers directly, eliminating the middlemen who act as a conduit and distort the message. From an advertising perspective, the power is now also in the hands of the shopper. The public is being given opportunities to be paid in tokens when they are exposed to advertising, and they can decide which data about them is used for this purpose. It ultimately helps brands target their products more efficiently, giving them greater value for money.

Miners are rewarded, but the costs are high.  

Proof-of-work — known as PoW — sees miners compete to become the first person to solve mathematical puzzles using their computation power. Miners who beat their rivals to the punch are then rewarded in the form of cryptocurrency, and major networks — including Bitcoin and Ethereum — use this consensus algorithm.

Fans believe that PoW delivers an array of benefits. First off, it insulates a platform against denial-of-service attacks. Additionally, it puts miners on more of a level playing field, and decision making on a network does not hinge upon their wallets. Instead, they should be willing to splash out on hi-tech machines that can be very expensive to run.

One could argue that PoS provides a double incentive.

Here, the onus changes to “staking,” where miners have a better chance of being chosen to add a block to the chain — and hence get rewarded — depending on how many coins they possess. As well as being motivated to invest in a platform and support a currency to increase their profitability, there are the rewards to think about on the horizon.

Although it has addressed some of the issues inherent in the PoW protocol — namely the extraordinary costs involved with mining, which can run into hundreds of thousands of dollars a day — it does deliver its own disadvantages. For example, PoS does run the risk of monopolization, where a few validators rich in coins end up receiving the lion’s share of the rewards.

All of this said, PoS does inoculate a platform against a so-called “51 percent attack” — as such an attack would likely devalue the digital currency which the validators themselves own. In a PoW scenario, miners can reap rewards even if they don’t own the asset involved. Again, it just goes to show that incentives in the crypto world can present themselves in many ways.

Potentially, as one of the biggest ways to incentivize crypto users is to create utility.

One of the biggest challenges for many crypto startups out there is that they hold crowd sales for utility tokens, but it is not clear whether or not they will be able to satisfy the public’s demand that the tokens be used in exchange for goods and services.

To incentivize the public to embrace cryptocurrency, there need to be clear benefits in using this new form of payment in the first place — offering something that they would not be able to find somewhere else.

Shopping is something we all do every day, and old habits die hard. When it comes to incentivization, it is necessary for crypto startups to think outside of the box in order to encourage the public to try something new. Systems for mobile payments with crypto at offline and online stores such as Elipay are addressing this challenge by offering shoppers cashback in the form of crypto tokens whenever they make a purchase. This solution was to create a network of retailers at which people can spend their assets without converting them back to old-fashioned currencies.

This marketing tool has been suffering issues for years.

In the non-crypto world, consumers are overwhelmed by the number of schemes offered by retailers and are disappointed by the rewards. Blockchain projects are hoping to inject some innovation into this sector by offering schemes which are meaningful to shoppers.

The startup behind Elipay — Eligma — says its approach involves a universal loyalty scheme. Instead of carrying around a wallet full of cash and credit cards, consumers will be able to shop and receive rewards from a plethora of merchants in one place. The tokens that customers earn can then be used for further shopping or for receiving the benefit of discounts on goods and services. This also has the potential to deliver a boost to merchants who have been struggling to compete with online giants such as Amazon, as they can offer compelling deals to drive repeat customers.