Game theory is a concept that analyzes the interaction between individuals and the decision-making process in a specific setting. The concept can be applied to cryptocurrency because it enables developers to predict the outcomes of their networks in an effective manner.
John von Neumann developed game theory. In 1928, he came up with the concept of Minimax Theorem, which is defined as “a theory in the theory of games where the lowest maximum expected loss equals the highest minimum expected gain.” Today’s game theory stems from the Minimax Theorem.
Understanding Game Theory
Game theory is defined as “a situation involving a set of players who each have a set of possible choices, in which the outcome for any individual player depends partially on the choices made by other players.” Those who participate in scenarios and apply game theory are often dealing with situations where stakes are involved. The players are often considered to be rational and interested individuals who are trying to maximize the outcomes for themselves.
Once players have chosen a set strategy that maximizes their benefit, a payoff ensures. Essentially, game theory comprises of the decision makers, the strategy, and the payoff. When there are only two players involved, the term “payoff matrix” refers to the available options.
Game theory features five different games. The first main categories are cooperative and non-cooperative games. The former is where players work together to achieve a certain outcome, while the latter is where players do not work together and it often leads to the most accurate results.
There are also simultaneous-move games and sequential-move games. The former is where players make decisions at the same time. On the other hand, the latter is where the players are aware of the strategies and options facing other opponents.
Finally, there is the zero-sum game. This is perhaps the most well-known type of game and it entails scenarios where one player gains at the total expense of the other player.
Another very popular concept associated with game theory is Nash Equilibrium, which was developed by mathematician John Nash. According to a source, this concept is defined as:
The solution to a game in which two or more players have a strategy and with each participant considering an opponent’s choice, he has no incentive, nothing to gain, by switching his strategy. In the Nash Equilibrium, each player’s strategy is optimal when considering the decisions of other players. Every player wins because everyone gets the outcome they desire. To quickly test if the Nash Equilibrium exists, reveal each player’s strategy to the other players. If no one changes his strategy, then the Nash Equilibrium is proven.
Essentially, players here act in their best interests at all times due to self-preservation. A very popular scenario applied to understand this concept is the Prisoner’s Dilemma, which ultimate leads to the conclusion that what is best for the individual may not be the best for society.
There are those who argue that blockchain is a self-enforcing Nash Equilibrium and that game theory itself builds a network where players are incentivized to act and to continue operating in a manner that leads to net positive outcomes for the whole. For instance, blockchain technology prompts mining and validation of transactions. Accordingly, miners are rewarded with new units – and so long as miners are honest, the network benefits and functions properly.
Miners can also realize the best outcome by mining continuously on the correct chain, as they have the highest chance of gaining net bitcoins. Further, when there are two players in a blockchain, miners are more likely to remain honest.