Game theory is fundamental to the development of distributed digital currencies like Bitcoin and plays an essential role in creating the eco-system of such blockchain protocols. The utilization of game theory helps in examining the behavior of people based on rational decision-making, offers explanations for their strategic activities and helps users understand the potential outcomes of their actions in pre-defined circumstances.
The prisoner’s dilemma is famously renowned in game theory and serves as an example to illustrate the power of game theory models. This example states that two criminals, A and B, who have been arrested and interrogated separately, receive an offer from the prosecutor. If either A or B testifies against the other, they are set free and the other person is arrested for three years. If both of them decide to betray, they are both arrested for two years. Lastly, if they both decide not to delate, they are only sentenced to one year in prison since there is a lack of substantial evidence.
Game theory also has an enormous effect when constructing a secure and trustless economic system which Bitcoin has managed to do over the past decade. The idea of cryptoeconomics refers to the study of financial aspects of blockchain technologies and investigates the possible outcomes of the design of these protocols defined by cryptocurrency participant behaviors. The analyst would consider the activities of external agents which may join the network later and disrupt it from the inside.
For Bitcoin’s Proof-Of-Work (PoW) consensus algorithm, costly and demanding miners incentivize miners to act honestly. Network nodes that display dishonest behavior will waste their resources, get kicked out and have to face the consequences of their actions. Examples like this help demonstrate why rational decisions based on game theory models could be the best solution in many circumstances.
It is also noteworthy to mention the role of trustless environment when utilizing game theory models. Ultimately, the number of participants a blockchain has relates to the level of safety of the network. A larger pool of users creates an ecosystem that is more reliable and secure compared to a blockchain with smaller users.
To conclude, game theory is essential to the development of distributed digital currencies like Bitcoin, offering vital trust and reliability. The concept of game theory has been used to analyze the inner workings of cryptoeconomic systems and allows the users to consider logical and rational decisions while utilizing the technology before them.
