What is Game Theory and can it be applied to Crypto? Guide for Dummies
The number of blockchain enthusiasts is also increasing day by day.
You will often encounter different terms and technology as a blockchain enthusiast, one such term which is very new though a very effective one is, Game Theory. You must be wondering what Game theory must be composed of. Will it be something related to games?
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This Game theory has nothing to do with what games are, they revolve around the circumference of providing ease in the management of bitcoins and interaction among different cryptocurrencies. But, what was the original idea behind the working and development of this game theory?
Let’s start by discussing the core belief of this theory, a series of books published by John Von Neuman. This theory helps you in taking optimal decisions on the basis of a mathematical approach and involves making strategies for better understanding.
You can find different models illustrating this theory in real life, one such famous model is the Prisoner’s dilemma.
The Prisoner’s Dilemma
This model gives and comprises different cases and their probability regarding the situation created in the jail between 2 prisoners A and B, where if prisoner A testifies against prisoner B, he or she gets free while the other faces 3 years of imprisonment and vice versa. There are different cases and after studying each case, the best one among them is found.
This example illustrates the fact that game theory helps you in understanding human thinking, behaviour and different situations possible based on decision-making and ultimately improves the rational thinking of you as an individual.
This must have given you a brief understanding of what is game theory and what it does, moving ahead let’s take an insight into how this theory is getting along with cryptocurrencies.
To make this easy and handier, the Crypto-Economics was developed using game theory, which helps you as an individual in studying different bitcoin designs and examining the consequences situated with those protocols.
This crypto-economics is a combined result of economic benefits or incentives you are looking for as well as the Cryptography, i.e. the secure connection and communication among people, it is also a key contributor towards safe, secure and peer-to-peer better network opportunities.
The Game Theory of crypto-economics also helps you in judging the protocols on the basis of the external factors which can sooner or later be a part of the whole ecosystem and can lead to disruption in its movement.
The application of Game theory is not limited to crypto-economics, they are also known for their essential role in the trading domain. Taking a deeper dive, let’s see how game theory helps in trading in general.
What as an investor do you look at at the time of investing? The right time to invest as well as the right time to sell isn’t it? These entry and exit gates are determined using the game theory, likewise, every time you think of trading there are two cases either profit or loss just like the game of poker.
Many such cases include both the profit and loss at equal probabilities, game theory helps in simplifying the whole cases by dividing them into cases.
More about Game Theory and Cryptocurrency
Moving forward let’s take a look at what cryptocurrency has more in accordance with game theory. As we all know that cryptocurrency works on the multiple node principle, where there are different multiple nodes located at different locations underlying the process of transactions and these nodes collectively need to validate the transactions or the blocks.
But, these many large nodes are not easy to manage and they do not really trust each other, which ultimately fails to provide security in total. This issue in the case of Bitcoin is solved using the Proof Of Work Algorithm, BTC is an implied case of the POW algorithm.
Bitcoin can also be considered as a currency which successfully combines cryptography and the art of secure connection to the successful game theory for the achievement of decentralised systems which are not prone to attacks.
Conclusion
Thus, putting it all together the game theory may be used to investigate how people behave and make reasonable decisions. When building decentralised systems, game theory should be used as much as possible. For instance, the blockchain technology used by Bitcoin mixes cryptography and game theory to create a decentralised environment that is secure against assaults. Other cryptocurrencies use methods like Proof of Stake to implement game theory (PoS).
We are entering a decentralised future because of blockchain technology but it is still in its early stages. The fundamental components of our framework are the mechanics of game theory, which guarantees that these innovations' social functionality is satisfied.
Some models use the assumption that the majority of network users are trustworthy rather than relying on economics to provide security. In this sense, honest nodes can create the largest chain and outperform any attackers if they have the majority of the network's CPU power.
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