Game theory plays a key role in cryptocurrencies like bitcoin. Whether it’s the payoff matrix, Nash equilibrium, the prisoner’s dilemma, Grim trigger, Schelling points or bounded rationality, game theory concepts have big implications for blockchains and cryptocurrencies.
“Bitcoin and blockchain will grow the game theory field if they have not already,” says Vincent Brunet, Chief Technology Officer for virtual reality software provider Nanome Inc. “Game theory is a major consideration when designing many blockchain and cryptocurrency applications. Blockchain businesses, cryptocurrencies and smart contract-based crypto-tokens need sound game theory or else they won’t last.”
“When miners spend time and energy on electricity and computing the hash of a block, then they need that block to be correct so it is accepted by the network,” says Brunet. “That’s how they receive the block’s mining reward.” Otherwise miners lose time and money, and eventually everyone refuses to interact with their node.
“Bitcoin miners competing, proving they produced a specific block, as well as half the network having to agree on the next block, is the first game theory to work in the context of digital currencies,” notes Brunet, who is currently wrapping up work on Nanome’s blockchain-based decentralized collaboration platform, Matryx. “In bitcoin’s decentralized model, if miners want to earn rewards, they have to abide by the rule of bitcoin. For seven years, this has worked well.”
Bitcoin’s game theory, which is driven largely by the network’s mining complex, inspired Ethereum. Although it uses the same game theory as Bitcoin, Ethereum empowers developers to design and implement their own game theory systems in the form of smart contracts.
A smart contract denotes a computer protocol that facilitates, verifies or enforces the negotiation or performance of a contract. Brunet believes smart contract systems have a long way to go before they are robust enough upon which to base business. And now, a new concept of oracles is gaining traction.
“Oracles employ their own unique types of game theory to facilitate the provision of factual data about the real world in a distributed system, and help blockchains reflect the real world with accuracy,” said Brunet, who specializes in blockchain and virtual reality development. “An oracle is basically a game theory that forces people to report correctly that which has transpired in the real world or they get financially penalized. If it’s done correctly, they get financially incentivized. Blockchain incentivizes people to tell the truth about the world.”