Flow is potentially the most important concept in all of gamification. Flow is the state of mind commonly referred to as being "in the zone", and it essentially describes the highest level of engagement  where a person can be completely consumed by what he / she is doing.

Gamification in it's fundamental form is about helping people enter flow, so it's vital to understand what flow is and how it works.

In it's most basic definition, flow is achieved when a person is working on an activity that is in their perfect challenge level. Activities that are too easy are boring and activities which are too difficult are frustrating and demoralizing.

While gamifying, keep flow always in mind. The goal is to help people achieve activities which challenge them and help them learn or develop a skill. Not too easy, not too hard. Flow.

To fully encourage flow, activities should have clear objectives and provide immediate feedback.

Take the first 007 video game for example. As the player progresses through levels, he is faced with challenges - bad guys - and his objective is super clear: kill them. He also receives immediate feedback as he attempts to do so, as he sees his shots either hit or miss his target and ultimately sees his target die.

This provides a very tight learning loop which both helps the player develop skills quickly and provides a clear sense of accomplishment when he is successful.

Gamification is often spoken of in the context of "game mechanics", which are elements such as points, levels, leader-boards, and badges.

Many application of gamification in the business world are fantastic examples of game mechanics, like LinkedIn's progress bar, credit cards' rewards points, and buy 10 get 1 free cards.

While using these programs no doubt proves more successful than operating without them, they're often not true gamification.

Game mechanics provide a structure - a framework - to plug activities into. Once filled with activities, this structure's purpose is to guide people from activity to activity.

True gamification - designing for high levels of engagement - is achieved when a person enters a state of Flow, which requires that the activity he / she is doing be engaging in and of itself.

Skateboarding offers no game mechanics whatsoever, but it's highly engaging to some people.

Credit card rewards points offer awesome game mechanics, but earning them isn't an engaging activity for most people.

When designing gamified systems, both mechanics and activities must be considered if the goal is to achieve true engagement.

To rely wholly on mechanics and neglect activities is what many people consider "the dark side" of gamification - manipulating people to do what you want with no real benefit to them, much like playing a slot machine.

(If the activity is something that's boring but must be done anyway, however, game mechanics can be a major help to spicing it up.)

In conclusion, make sure your activities themselves follow the principle of flow.