Incentives Don't Solve Blockchain's Problems

Abstract: A blockchain faces two fundamental challenges. It must motivate users to maintain the system while preventing a minority of these users from colluding and gaining disproportionate control. Many popular public blockchains use monetary incentives to encourage users to behave appropriately. But these same incentive schemes create more problems than they solve. Mining rewards cause centralization in "proof of work" chains such as Bitcoin. Validator rewards and punishments invite attacks in "proof of stake" chains. This paper argues why these incentive schemes are detrimental to blockchain. It considers a range of other systems---some of which incorporate monetary incentives, some of which do not---to confirm that monetary incentives are neither necessary nor sufficient for good user behavior.