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“To defeat the enemy men must be stimulated to combat; for there to be attraction in defeating the enemy there must be rewards and prizes. Prisoners of war must be treated with kindness in order to control the enemy.” – Sun Tzu, The Art of War (5th Century B.C.)
As has been known for millennia, humans are driven by incentives. In the past, a deep understanding of these incentives was used by military strategists. Today we use them to design decentralized protocols and business models.
In 2017 a way of launching new cryptocurrencies to the market exploded in popularity, the famous ICOs (initial cryptocurrency offerings). ICOs were harshly criticized for functioning, for the most part, as Ponzi schemes (scams).
At that time the term IBO (Initial Bounty Offering) was also coined. In this article we will discuss this incentive-based approach to launching a new token.
The initial reward offering or IBO is a way of launching a token to the market similar to ICOs. The creating company or organization, instead of selling the tokens, offers them in exchange for certain services.
In this way the resulting incentives are more powerful. The services to be performed will be related to the company itself, as we will see below.
Incentives are a key concept in understanding how humans function and building successful businesses and protocols.
A paradigmatic example of the effect of incentives was the introduction of seat belt regulations. Paradoxically, after it, the number of accidents increased (although the number of fatalities decreased). By having a safety feature, theA paradigmatic example of the effect of incentives was the introduction of seat belt regulations. Paradoxically, after it, the number of accidents increased (although the number of fatalities decreased). By having a safety feature, the incentive to be more careful was reduced. was reduced.
Another example of an incentive manual is Bitcoin itself, where miners are incentivized to seek the best for Bitcoin instead of attacking it. As a consequence Bitcoin holders also have incentives to contribute to the improvement of the cryptocurrency.
Similarly, “bug bounties” seek to discourage computer attacks. They are carried out by large technology companies and, now, also in cryptocurrencies. They reward monetarily anyone who discovers errors in the code or bugs.
Incentives are also a fundamental part of a successful DAO or DeFi protocol. In liquidity mining, for example, liquidity providers are rewarded with the protocol token that brings them benefits (such as additional rewards for blocking coins).
Similarly, the IBO approach seeks to align user incentives with the project on which the token is based. Instead of spending money to buy the token, users will be able to obtain it at no monetary cost (or at a discount) in exchange for valuable services.
These services can be translation, marketing, business development or human resources. But these types of resources cannot be verified by a blockchain, and will be remunerated by the centralized organization behind the project.
In IBOs the token holders have been more actively involved than in ICOs. Therefore, they would have developed more affinity. The fact that the coin holders are emotionally invested could increase the probability of success of the project.
The truth is that the term IBO is not nearly as widely used and known as ICO. In general, any incentive system such as DeFi protocols may well fall into this category (with rewards distributed in a decentralized manner with the governance token).
The term may be completely obsolete, but the general idea of aligning incentives is more alive than ever. This idea can be found in old treatises on strategy such as that of Sun Tzu, whose book, “The Art of War” has become very popular.
Sun Tzu created a treatise applicable to modern business, although his intention was to apply it to warfare. Satoshi Nakamoto also created a treatise on incentives with his Internet postings, although his intention was to create digital money. For sure Satoshi will be seen as a modern Sun Tzu!