Game theory is fundamental to the development of cryptocurrencies and is one of the reasons why Bitcoin managed to thrive for over a decade. This article will show you what is game theory cryptocurrency.
What is game theory cryptocurrency?
Essentially, game theory is a mETHod of applied mathematics that is used to study human behavior based on rational decision-making. The “game” is designed as an interactive environment, so players tend to act rationally when responding to the game rules or to the influence of other players.
The concept was initially developed in economics to investigate the behaviors of businesses, markets, and consumers, but is now extensively applied in other fields of study. Therefore, game theory models may be used as a tool to examine the potential behavior of interacting agents, and the possible outcomes of their actions, under predefined circumstances. The models may also be applied in the broad study of politics, sociology, psychology, and philosophy.
Game theory and cryptocurrencies
When applied to cryptocurrencies, game theory models play an important role when designing a secure and trustless economic system.The use of game theory within the cryptocurrency context is what gave birth to the concept of cryptoeconomics, which is basically the study of the economics of blockchain protocols and the potential consequences that the design of these protocols may present - as a result of its participant behaviors. It also considers the behavior of “external agents” that are not really part of the ecosystem, but could eventually join the network only to try and disrupt it from within.
In other words, cryptoeconomics examine the behavior of the network nodes based on the incentives provided by the protocol, considering the most rational and probable decisions.
Since the Bitcoin blockchainis designed as a distributed system - with many nodes distributed around different locations - it needs to rely on the agreement of these nodes in regards to the validation of transactions and blocks. However, these nodes are not really able to trust each other. So how can such a system avoid malicious activity? How can a blockchain prevent being disrupted by dishonest nodes?
One of the most important features of the Bitcoin network that protects it from malicious activity is the Proof of Workconsensus algorithm. It applies cryptographic techniques that cause the miningprocess to be very costly and demanding, creating a highly competitive mining environment. Therefore, the architecture of PoW-based cryptocurrencies incentivizes the mining nodes to act honestly (so they do not risk losing the resources invested). In contrast, any malicious activity is discouraged and quickly punished. The mining nodes that present dishonest behavior will probably lose a lot of money and will get kicked out of the network. Consequently, the most probable and rational decision to be made by a miner is to act honestly and keep the blockchain secure.
Closing thoughts
From the above passage we already know what is game theory cryptocurrency. The general application of game theory is to model and examine how humans behave and make decisions based on their rational minds. Therefore, game theory models should always be considered when designing distributed systems, such as the ones of cryptocurrencies.
Keep in mind, however, that the degree of security and resilience a blockchain has is dependent on its protocol and is directly related to the number of participants of the network. Larger distributed networks are more reliable than smaller ones.
