Misaligned, partially aligned & fully aligned incentives

Comparing some of the differences between misaligned, partially aligned and fully aligned incentives

Incentives have a large influence on how systems actually operate in practice and whether those systems are able to consistently generate beneficial and impactful outcomes. The systems and processes that a Web3 ecosystem adopts could result in a number of misaligned, partially aligned and fully aligned incentives.

Incentives can sit somewhere along a range from misaligned through to fully aligned. When incentives are misaligned it becomes increasingly difficult to generate the desired and intended outcomes that might be most beneficial to an ecosystem. Fully aligned incentives can help with decision making and generating impactful outcomes due to the incentives being more consistently beneficial to everyone involved.

An ongoing priority for Web3 ecosystems is the identification and removal of as many misaligned incentives as possible so that they can be replaced with incentives that are more fully aligned.

Misaligned incentives

Misaligned incentives can lead to suboptimal decision making and outcomes. Treasury systems and processes that do not perform well can eventually break down the trust a community has in these ecosystems. Misaligned incentives can lead to resource misallocation, short term thinking, increased centralisation and ethical and social concerns. Misaligned incentives should ideally be removed from an ecosystem to increase the likelihood that impactful outcomes can be more consistently achieved.

Large existing project funding a new competing project

An existing project that has it’s own token and treasury has little incentive to help fund a competing project that could take away their market share and reduce their own tokens value. That existing project could also have people who are token holders in other larger projects. These token holders could have influence across these different projects and be another reason why emerging projects get little support from existing projects that have their own treasuries. One way to avoid this misaligned incentive is to use more base network incentives that can fund different ecosystem initiatives that might offer improvements over existing protocols and applications.

Short term thinking for project strategic planning

Contributors could develop solutions and use cases that are beneficial for a project in the short term such as those that help gain exposure, increase the immediate opportunity for compensation or that briefly increase a tokens value. Some of these efforts could be made for short term gain at the detriment of achieving the longer term goals that would have been more beneficial to the wider ecosystem.

Partially aligned incentives

Partially aligned incentives sit in the middle between misaligned incentives and fully align incentives. Partially aligned incentives occur when there is a clear shared benefit in supporting a certain initiative however there is also a counteracting incentive that encourages people to consider not supporting that same initiative. Partially aligned incentives could cause a larger amount of governance and decision complexity for communities due to the need for them to agree on conflicting arguments and reasons to support or not support a given initiative.

Existing project funding open source library for ecosystem

There could be many projects in an ecosystem that each have their own token and circular economy that they are trying to grow. These projects each have an incentive to help support open source libraries that could benefit their own project as well as the wider ecosystem. The reason why this incentive is only partially aligned is that if some projects don’t support the initiative and others do there is an unfair advantage for those who only use their treasury assets for their own direct benefit rather than the benefit of the wider ecosystem. These other ecosystems would get the full benefit of the open source software yet provide no compensation to supports the required contribution efforts. These differences in financial support could also give some projects a competitive advantage over other projects that have been more giving with their treasury assets to support public goods.

Number of tasks completed incentives

Some task based incentives could be only partially aligned with generating the right outcome. For instance a task incentive that rewards people for each proposal assessments they submit has the risk of encouraging people to submit many lower quality assessments due to the incentive structure. This type of incentive might likely require a number of checks and balances to ensure a certain quality threshold is met or an improved incentive structure that rewards higher quality assessments more heavily than lower quality ones.

Fully aligned incentives

Fully aligned incentives occur when there is shared alignment and benefit to support an initiative and little to no incentive for people to not support that initiative. Fully aligned incentives will mean that both the givers and receivers of the incentive should mutually benefit from an initiative being executed.

Open source utility library funded by base network incentives

The networks own treasury being used to fund open source utility libraries is an example of a fully aligned incentive. The entire ecosystem could benefit from the open source utility library and there aren’t any other incentives that discourage people from supporting that initiative. The complexity in this example would be a decision based one for the community as they will need to provide their feedback and preferences about which open source libraries they believe are the most impactful to support and execute.

Impact focused contributor incentives

Contributors who are paid directly from a Web3 ecosystems treasury to generate impact could be another example of a more fully aligned incentive. The provider of the incentive, the communities ecosystem treasury, wants to select and compensate competent professionals to improve the network and the use cases it provides. The contributors who would be receiver of that incentive want to be paid for their contribution efforts that help with executing impactful initiatives.