The year was 2009. We were all picking up the pieces after the economy imploded. Avatar and skinny jeans under chunky boots were in — — bottle service and no-income, no-job, no-asset (NINJA) mortgages were out. It was the year that saw the birth of an ambitious taxi startup called Uber and the final curtain of the “King of Pop.”
This was also the year that a quirky research project sponsored by DARPA changed my life:
To mark the 40th anniversary of the Internet, DARPA has announced the DARPA Network Challenge, a competition that will explore the roles the Internet and social networking play in the timely communication, wide-area team-building, and urgent mobilization required to solve broad-scope, time-critical problems.
The challenge is to be the first to submit the locations of 10 moored, 8-foot, red, weather balloons at 10 fixed locations in the continental United States. The balloons will be in readily accessible locations and visible from nearby roads.
DARPA challenged researchers to find the 10 Red Balloons they had placed all over America. The MIT team solved the DARPA Red Balloon Challenge in less than 9 hours!
How did MIT find the 10 Red Balloons so quickly?
They promised $2,000 to the first person who submitted the correct coordinates for a single balloon, and $1,000 to whomever invited that person to the challenge. Another $500 would go to the person who invited the inviter, and so on. In other words, they developed a system to reward not only the finders of the solution, but also the creators of every social graph that contained a solution within its subtree— namely, referrals. Put simply, they hacked incentives. Through an ad-hoc incentive market, MIT solved a complex task almost magically! (Notice that they did so at a fixed cost, too, since each balloon would cost them no more than $1000+$500+$250+$125+… = $2000.)
I became obsessed with the idea of incentive hacking to form networks and markets, and it has guided my research ever since — so much so that when I founded a startup to commercialize my work, I called it nCent Labs. I would like to share with you 10 lessons I learned from these 10 Red Balloons:
- Incentives work. They just do. Get them right and win.
- Get as close to theoretically optimal incentives as you practically can. The MIT solution can be shown to be a stylized Nash equilibrium.
- There’s a tradeoff between maximizing virality and preventing fraud. Sybil attacks (or copying your identity) could have harmed the MIT team, but the viral speed meant the solution was found before Sybil could derail their objective.
- A good way to combat fraud is designing penalties for fraudulent behavior. Put another way, design a viral incentive system that directly dis-incentivizes fraud. This is the holy grail. When you see it work in practice it is a beautiful thing.
- What holds the power of incentive markets back is the problem of value attribution. MIT stated a clear exponential value attribution formula upfront. It may seem like simple accounting, but correctly attributing value creates the incentives to motivate individuals and drive a spirited community.
- Trust is Dead. Long Live Trust! People trusted DARPA and MIT to run a fair, creditworthy program. Credibility is a fundamental building block for individuals to believe the program will benefit them as promised. If this credibility can be formed trustlessly, without the need for a central authority, the program can achieve internet scale.
- Solve value attribution, create incentives that are credible, and a market can form. Incentive markets can be much more efficient than firms — and at internet scale they could be unstoppable.
- We know valuable, private information about each other. We know each other’s capabilities, skills, interests and motivations (and even who might be good at finding red balloons!).
- Only a small fraction of that information gets online — and an even smaller fraction is put to productive use. Facebook could not have solved the Red Balloon Challenge with just their collective online profile information. You are more than your online profile.
- Incentive markets are a way to harness our collective talents and boost all problem solving everywhere!
Come build scalable incentive markets with us at nCent Labs. Share in our vision. Help us on our quest to find the “11th” Red Balloon.
If you would like to learn more please email me: kk@ncnt.io. To stay in the nCent loop, hear me tweet and join our international telegram channel.
Warmly, -KK