Web3 Reputation: Introducing Dynamic Incentives into Distributed Networks

Abstract

We introduce dynamic incentives into distributed systems via formally incorporating (decentralized) suppliers/users' reputation. Reputation aligns contributors’ incentives with platform welfare and makes myopic service providers internalize their long-term impacts. Starting with Proof-of-Stake (PoS) as an example, we show that Web3 reputation allows networks to support more throughput with same amount of staking, and averts cryptocurrency price shocks to suppliers by transferring cyclicality risks in transaction fees to users. We further analyze how dynamic incentives mitigate moral hazard in decentralized reporting game (e.g., for modeling oracle networks), and demonstrate how decentralization solves wealth concentration caused by dynamic incentives. Our findings validate proposals of adding Web3 reputation to distributed networks for efficiency improvements and long-run sustainability.

Keywords: Decentralized Identity, Blockchain, Dynamic Incentive

JEL Classification: D47, D86, L86,