Context:

Picture this - you are the founder of your own business and the only person working on it. You have control over everything and are involved in every decision.

As the company grows and you hire more people into your business, you'll start to lose some of that control because everyone coming into the business is not you. They may not have the same skillset (which can be good or bad), may not have the same work ethic or the same objectives as you.

When we think about objectives - you as the employer want to make as much profit as possible. Your employees just want to get paid and get by. They don't really care whether the profits are up or down as long as they get paid.

Incentives as an alignment tool

This is why a lot of traditional businesses will consider incentives as a tool to align the owners and employees. Incentives work because when money is tied to behaviour, people will usually do it.

Charlie Munger famously coined the phrase "Show me the incentive and I'll show you the outcome" which suggested that people will typically do what they are incentivized to do.

Short Term versus Long Term Incentives

There are a LOT Of different kind of incentives - from cash payments, deferred bonuses, restricted stock units to stock options etc.

A super simple way to categorize them is into short term and long term incentives:

• Short-Term Incentives (STIs): Payouts tied to performance within a year.

• Long-Term Incentives (LTIs): Payouts that stretch over several years (sometimes in the form of stock)

You want the right balance between short term and long term - a specific example is if an executive received a short term bonus for delivering $100m of profit in a year.

If the company is sitting on $99m for the year, the executive is close to qualifying for his bonus. This will make them more risk averse - not wanting to invest in something even though that investment may be a good long term decision. They may hold off on a marketing campaign which could accelerate the long term growth or they may prioritise decisions with a quicker payoff versus investing in something which might take longer to see the benefits. This bias towards achieving their short term incentive clouds their judgement.

Long term incentives are a counter measure - You want the pull from the long term incentive to be bigger than the alure of the short term incentive and this is why the payoff for long term incentives is typically larger in relative terms.

Using Incentives to understand Zora's Creator Economy

Now let's look at one specific case study in Crypto, specifically Zora

The mechanic is as follows

• When someone creates a profile, a Creator Coin is minted. It has a fixed supply of 1 billion coins.

• Half of that supply is locked and released slowly over five years.

• Every time the creator makes a post, a new Content Coin is also minted. The creator gets 1% of that coin’s supply up front.

• All these coins (Creator and Post coins) can be bought and sold, so their value is entirely market-driven.

Zora has essentially put together a structure of short term and long term incentives

• Some accounts may dump their supply of post coins or creator coins - this action gives them a quick pay out but reduces the price -> same as sacrificing long term company growth to qualify for a short term bonus

• Other creators take a different approach - they see their creator coin as a direct reflection of their brand and selling early would only devalue it. If they instead build the brand over the next 5 years the potential payoff would significantly outweigh any short term gains they could make by selling their posts/creator coins. It's the equivalent of the executive investing in something today (missing out on the short term incentive), knowing that there is a longer term payoff

$Kazonomics - a pioneer in the space

$Kazonomics (https://zora.co/@kazonomics) run by @TheRealNomics (https://x.com/TheRealNomics) demonstrates this long term thinking really well:

• He hasn't sold any creator coins

• He never sells any post coins (except when fighting sniping bots - which actually show that he's willing to hurt himself financially to help his followers)

• He is simply building/creating and letting the value accrue over time

• It's a masterclass demonstrating what long term thinking can do and the best part is he is taking all his followers with him which creates the perfect alignment between himself and holders

Value that Grows together

By holding his own coin and not selling early - he signals conviction. He benefits as the coin appreciates, but so does everyone else holding the coin. No one is working against anyone else and everyone is rowing in the same direction.

"Trade Learn Profit"

This mantra from the https://www.kazonomics.com/ website demonstrates how his brand creates a flywheel effect for his Zora creator coin:

• His artwork and blogposts teach his followers key concepts about behaviour and markets

• His followers trade using his core logic, learn how to become better traders and ultimately profit

• Once they profit it creates a self reinforcing cycle

  • They can use their profit to spend on the artwork/blogposts/Zora coins

  • They also become lifelong followers as they achieve life changing results

• These lifelong followers are the ones that will participate in the creator coin appreciation and hold strong during the downturns

Why this alignment matters

Most Crypto "Projects" fail because their creator's incentives and the community do not align - the creators hold a large % of the supply and are keen to sell as much as they can leaving followers holding the bag.

$Kazonomics flips that dynamic - he created a mechanism where his best outcome is the same as his follower's best outcome - keep building, teaching the community to trade learn profit and letting the value of the eco system rise over time.

It truly creates an environment where everyone can win together.