Game Theory

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The game theory is fundamental to the development of digital currencies and is one of the reasons that have led to success for more than a decade despite numerous attempts to disrupt the network.

The definition of game theory

Basically the game theory is a method of applied mathematics that is used to study human behavior based on rational decision-making. The game is designed in an interactive environment so that players tend to act rationally when responding to the rules of the game or to influence other players.This concept was initially developed in economics to investigate business behaviors, markets, and consumers but is now widely applied in various fields of study. Therefore, game theory models can be used as a tool to examine the potential behavior of the interacting factors and the potential consequences of their actions under predetermined conditions. Models can also be applied to the study of politics, sociology, psychology, and philosophy.

History of gaming theory:

Science theory was founded in 1944 by John von Neumann and Oscar Morgen Stern, and he became famous for their book The Theory of Games and Economic Behavior. In 1994, John Nash, Renard Celtien and John Harsaniye received the Nobel Prize for Economics for their contributions to the field of game theory.

Timeline:

– Before 1944: Some works by Corneau Borel and Minister Melo

– 1944: John von Neumann and Oscar Morgen Stern author of Game Theory and Economic Behavior

– 1950 to 1960: Using the first economic models based on game theory and conducting some studies in experimental economics to confirm the validity of the results of game theory.

– 1972: Inserting game theory into evolutionary biology (evolutionary biology) where John Maynard Smith wrote the book Game Theory and Evolution of Combat

– 1994: Nobel Prize for Nash and his colleagues for their work, entitled: Balance Analysis in Non-Cooperative Game Theory

Prisoner’s Dilemma:

The prisoner’s dilemma is one of the most famous examples of the game theory model. It illustrates a scenario in which criminals (A and B) are questioned after their arrest. Each criminal is investigated in a separate room and is unable to communicate with the other criminal.

The prosecutor tries to persuade criminals to testify against each other as a way to reduce their charges. If A testifies against B, he is released and B is arrested for 3 years (and vice versa). However, if they betray and testify against each other, they will be arrested for two years. Finally, if both A and B decide not to betray and remain calm, they will be sentenced to one year in prison for lack of sufficient evidence.

So we will have the following possible outcomes (based on their individual decision):

Obviously, the best scenario for A (or B) is to betray one to the other until he is released, but that requires the other to remain calm and there is no way to predict what decision the other will make. When it comes to rewarding (commutation of judgment), many rational prisoners may choose to act on the basis of self-interest and betrayal of the other. But if both A and B betray the other they will be sentenced to two years in prison, and this is not the best result. So the best option for them is to keep calm and get only one year instead of two.

Prisoners’ dilemma may suffer from many variables but this simple story illustrates the idea of ​​using game theory models to investigate human behaviour and possible outcomes based on a rational decision-making process.

Game theory and digital currencies:

Game theory plays an important role when applied to digital currencies to design a safe and reliable economic system such as the Bitcoin system. The creation of Bitcoin as a Byzantine Fault Tolerance – BTF system is the result of a harmonious blend of cryptography and game theory.

It is the use of game theory in the context of digital currencies that established the concept of Cryptoeconomics and it is simply a study of the economics of blockchain protocols and the possible consequences that the design of these protocols may present as a result of the behaviour of the participants in them. It also takes into account the behaviour of external factors that are not part of the ecosystem but may eventually join the network just to try to disrupt it from the inside.

In other words, Cryptoeconomics studies the behaviour of network nodes based on the incentives provided by the protocol taking into account the most reasonable and likely decisions.

Since the blockchain is designed as a distributed system with many nodes distributed in different locations, it needs to agree to this node in terms of checking transactions and blocks. However, these contracts are not able to trust each other. How can this system avoid malicious activity? How can blockchain prevent crashes due to spoofed knots?

One of the most important features of the Bitcoin network that protects it from malicious activity is the Proof of Work algorithm. It implements coding techniques that make the mining process expensive and need more demands, which creates a very competitive mining environment. This is why cryptocurrency architecture based on the proof of work algorithm stimulates mining nodes to work faithfully (so as not to risk losing the resources invested). In exchange for this, any harmful activity is detected and quickly punished. Mining nodes displaying dishonest behaviour are likely to lose a lot of money and be expelled from the network. Hence the most likely and rational decision made by traders is to work honestly and maintain the integrity of the blockchain.

The conclusion:

The general application of game theory is to take as a model and study how humans behave and how they make decisions based on their rational/logical reasoning. Therefore, gaming theory models should be taken into consideration when designing distributed systems such as cryptosystems.

Thanks to the balanced mix of game theory and cryptography, the Proof of Work algorithm has created Bitcoin Blockchain as a highly decentralized, attack-resistant economic system. The same applies to other digital currencies, and game theory concepts also apply to the blockchain-based on the Proof of Stake algorithm.

But the main difference here is the way that blockchain which based on proof of Stake dealing with transactions and the process of verifying blocks.

However, it should be borne in mind that the degree of safety of the blockchain depends on its protocol and is directly related to the number of participants in the network. Larger distributed networks are more reliable than smaller networks.

By community member Dina Mahmoud