Despite the fact that Game Theory has a close relationship with the world of digital currencies, it is often ignored. This theory plays a very important role in Security of platforms has it. The task of game theory in the field of economics of cryptocurrencies, cognition and Understanding the main components of interaction between participants in cryptocurrency-based platforms. In the blockchain and the space where the economy of cryptocurrencies dominates, you can use the principles and rules of Game Theory to analyze the interaction between users and reach exciting results.
Join Valex to understand the role of game theory in the crypto world and its applications in this article.
What is Game Theory?
Game theory is a fundamental mechanism of blockchain technology. This theory allows cryptocurrencies such as Bitcoin to manage network disruptions and ensure the integrity of a distributed database. Game Theory is the science of studying rational decision making by players within the defined parameters of the system. This theory follows the model of applied mathematics and therefore it can be applied to economics, psychology, logic and decentralized systems. In general, game theory can be seen as a microcosm of human behavior (under certain conditions) where specific incentive mechanisms and structures can lead to honest and predictable behavior of participants.
In the main game theory scenario, there are 3 main components players, strategies And consequences There is. Players are the traders who make decisions in the market. Strategies are actions that traders take by taking into account the effective decisions of other players. Consequences are the result of the actions of the players in the system, which can be directed in a certain direction by using the right incentive mechanisms.
Prisoner’s dilemma scenario
Prisoner’s dilemma is the most common scenario used to explain game theory modeling. In this scenario, two criminals are arrested by the police. Prosecutors interview the criminals separately and determine a punishment for each in exchange for a confession against the other. At this time, none of the criminals have the means to communicate with the other.
- If prisoner A betrays prisoner B, prisoner A will be released without any punishment and prisoner B will be sentenced to 5 years in prison. The same applies to prisoner B.
- If both prisoners betray each other, each of them will be imprisoned for 3 years.
- Finally, if both remain silent and cooperate with each other, each will be imprisoned for only one year.
| B betrays A | B cooperate | |
|---|---|---|
| A betrays B | A and B will be imprisoned for 3 years. | A is released and B is imprisoned for about 5 years. |
| A cooperates | B is released and A is imprisoned for about 5 years. | A and B will be imprisoned for 1 year. |
Prisoner’s dilemma shows that if criminals are looking for their own interests, they will not get good results and the best option is cooperation. This scenario is a game theory model and a classic example of a non-zero sum game situation. A non-zero sum game is a situation in which the sum of profits and losses of the present players is greater or less than zero. This makes the non-zero-sum game feature to be competitive or non-competitive with zero-sum games (which are highly competitive).
Prisoner’s dilemma scenario can be used in different situations to show the behavior and interaction between players. In decentralized systems, this concept is at the culmination of achieving trustless consensus models and has important subfields when applied to cryptocurrencies in the crypto-economy.
Crypto economy
The economy of digital currency can be defined as a combination of cryptography, economics and incentive models of game theory in distributed blockchain protocols, which is creating a stable, stable and secure system. Since blockchain is a distributed database containing valid blocks (transactions); Miners must agree on which block to validate. In the case of Bitcoin, the validation of each new block is done by miners solving a difficult computational problem. This puzzle is called Proof of Work (PoW).
Consensus mechanisms
Consensus algorithms like Proof of Stake (PoW) In order to maintain cooperation without trust, they are based on game theory. In a resource-intensive competitive mining environment, game theory tells us that rational players are motivated to behave honestly in order to reduce the risk of losing their capital. With this, some malicious actors become unmotivated to cheat; Because the consequence usually includes the loss of resources.
For this reason, you can view mining as a repeated prisoner’s dilemma where each node uses a strategy that aims to minimize its own payoff regardless of the other players’ strategies. Distributed networks encourage cooperation between nodes without relying on trust between players. It is the players who act in such a way as to maximize their efficiency that ensures the stability and security of the blockchain.
In the proof-of-work consensus model, we see that distributed ledgers rely on the behavioral interactions of rational decision makers. That is, game theory enables platform security and consensus protocols. It is worth noting that a strong and flexible blockchain depends on its protocol and the number of nodes that use the network. The larger a distributed network becomes, the more vulnerable it is to attacks.
Game theory in the world of digital currencies
Game theory allows us to understand the motivation behind consensus models and recognize decentralized systems that are resistant to attack. By analyzing strategic interactions, we can create a distributed game that incentivizes players toward desirable outcomes and invents a code-based trust system instead of user decisions.
We are approaching a future where blockchain technology and digital currencies shape our everyday interactions on a larger scale, and Game Theory is a key ingredient in building such a future. However, game theory and cryptoeconomics are in their early stages of development and still have a long way to go to contribute to a wide range of fields.
How do you evaluate the application of game theory in the world of digital currencies? Can this theory help the growth of the market? Share your thoughts with us.
What is game theory writing? The application of Game Theory in digital currency for the first time in the Wallex blog. appeared.
