How the Hanoi Rat Massacre Informs Crypto-Economic System Design

tl;dr: What the 1902 Rat Massacre of Hanoi can teach us about the challenges of incentive design and unintended consequences in crypto-economic systems.

In 1902, Hanoi, Vietnam was being overrun by rats.

They carried disease and were a huge nuisance, so the French colonial powers implemented an incentive plan to decentralize the destruction of the rat swarms.

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Not wanting to be overburdened with an excess of rotting rat carcasses, the French asked for “proof-of-rat-death” in the form of a rat tail.

When a rat tail was presented at the main office, the reward was given.

Soon, however, the French authorities noticed a curious development.

There were rats running around all over town…without tails.

It turns out that enterprising Vietnamese realized that killing a rat would only make future rewards less likely. After all, you need rats to breed more rats with tails, which were the source of income.

What’s more, rat farms had sprung up in the countryside that served as “tail creation factories,” designed to maximize profit from the French bounty program.

“These days, the Great Hanoi Rat Massacre is mostly cited as an example of the “Cobra Effect,” an economic theory about how incentives, in a complex system, can lead to perverse, unintended consequences,” writes Shay Maunz in The Great Hanoi Rat Massacre of 1902 Did Not Go as Planned.

Incentives and Complex Systems

I think the connection to crypto and blockchains, by now, is probably somewhat obvious.

Going back a few years now, all the way to August 2016, in Blockchains, entrepreneurship, and new business models, I started to explore not just the tremendous technical innovation that blockchains represent, but something more important.

That, of course, is the opportunity for business model innovation.

I can’t claim to have realized this by myself as I most certainly took it from Fred Wilson’s post Technical Innovation vs Business Model Innovation from April 2006. Nevertheless, the potential for business model innovation is the most disruptive part of the crypto/blockchain revolution.

The primary difference between August 2016 and today, for me, is that it’s far less theory and more reality.

There is a ton of business model innovation in

  • finance with projects like Dharma, Compound, and dydx.
  • betting/wagering with Veil and Guesser
  • gaming with CryptoKitties and Cheese Wizards
  • journalism with Civil

and literally hundreds of others.

It’s no secret that I think Crypto-Economics Could Change Our Understanding of Value and that there is Explosive Potential in a Standard Digital Token Taxonomy.

At the same time, these are emerging crypto-economic systems based on “skin-in-the-game” incentives.

It makes me wonder what unintended consequences we will see.

How the Hanoi Rat Massacre Informs Crypto-Economic System Design was originally published in Data Driven Investor on Medium, where people are continuing the conversation by highlighting and responding to this story.