Bitcoin’s Incentive Scheme and the Rational Individual

Economic Rationality

Rational Behavior: Biological Roots

  • When the opportunity to extract gains (material or non-material) presents itself, our default mode of behavior is to take it to maximize our chance of survival, in the face of future uncertainty.
  • When two or more such opportunities arise, we will take the one that gives us more gains, provided that the gains can be accurately measured. Again, this is so that we maximize our chance of survival, in the face of future uncertainty.

Bitcoin’s Incentive Scheme

Side Note: Development Incentive

  • The common goal can be mathematically-defined: miners get paid for a hash that is smaller than or equal to the current difficulty target.
  • The common goal is computationally-verifiable: miners’ work towards the goal is verifiable by anyone, cheaply; and miners only get rewarded after the fact.

Acknowledgements

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