The Myth of Bitcoin Cash: Understanding Game Theory
Bitcoin cash will effectively cease to exist before it is bootstrapped and I will explain why in this article.
The Nash Equilibrium
Nash e·qui·lib·ri·um noun (in economics and game theory) a stable state of a system involving the interaction of different participants, in which no participant can gain by a unilateral change of strategy if the strategies of the others remain unchanged.
We can understand the Nash equilibrium perfectly in relation to a situation that the online poker industry faced and the general player reaction to it. Online poker players face a monopoly because of payment processing restrictions and the monopoly, Poker Stars, has been acting terribly towards its customers (arbitrarily increasing the cost of playing) to the point where the players decided to hold a boycott event.
There is an intrinsic problem though that the players were as a whole unaware of:
If the knowledgeable smart players boycott the Poker Stars tables, the tables will naturally have softer competition and be more profitable for the winning (boycotting) players. That is to says a winning player cannot unilaterally boycott and gain regardless if ultimately it would be a better result if the collective of individual winning players would do so.
On Rational Agents and Markets
Often people say the markets are not rational. This is not true and a misunderstanding of applying game theory and economic philosophy.
Let us re-solve this misunderstanding.
We can say instead, not that the markets are rational, but that by our definition a rational agent acts properly (correspondingly) in relation to their own utility function.
In other words, if a person likes apples more than oranges, then if they are offered a choice between apples or oranges they will choose apples. With no other considerations if they like apples but choose oranges we would call that irrational.
From this view, the markets can be described as always rational, but that we might not have all of the information available to properly understand and describe their underlying utility function (so they might SEEM irrational to the ignorant observer).
Understanding the Problem Solves the Problem
When rational players of a game are locked in an equilibrium it is by definition that they cannot deviate unilaterally towards a higher payout regardless if it exists even if a significant majority of the group recognize such a new equilibrium as a higher payout for each individual.
From a rational standpoint for an individual to move there must be a form of unilateral gain-yet by definition there is none available.
To move or divide the bitcoin network successfully one has to attend to this problem (I’ve yet to see it acknowledged or addressed by any proposal in any meaningful way).
How to Move to a Higher Payout Equilibrium
Here we can return to the understanding that money has the practical value of creating games for traders. These are games with transferable utility, but if the money were not available, the game of the traders would be a game without transferable utility and thus naturally a game with less efficiency with regards to the possibilities for the participants to maximize their combined gains.~Ideal Money
It is money that allows us to move beyond such sticking points by providing a medium of exchange for the transfer of utility. One of John Nash’s major insights was that money facilitates trade that otherwise wouldn’t exist allowing higher payouts to be achieved. The granular nature of the transferable utility allows each player to immediately gain from the cooperative decision.
From this perspective money is a higher order solution to an otherwise unsolvable problem:
When one studies what are called ”cooperative games”, which in economic terms include mergers and acquisitions or cartel formation, it is found to be appropriate and is standard to form two basic classifications:
(1): Games with transferable utility.
(2): Games without transferable utility (or “NTU” games).
In the world of practical realities it is money which typically causes the existence of a game of type (1) rather than of type (2); money is the “lubrication” which enables the efficient “transfer of utility”. And generally if games can be transformed from type (2) to type (1) there is a gain, on average, to all the players in terms of whatever might be expected to be the outcome.
A Brilliant TRADE-OFF
Bitcoin approaches a known limitation from a strange angle. A previously held problem went something like “How do we scale computationally when it’s clearly impossible to scale?” and somebody or some group instead flipped the problem on its head and said something to the order of “If we know we cannot scale computationally then perhaps that can be the basis for stability in our proposed solution”:
We need more socially scalable ways to securely count nodes, or to put it another way to with as much robustness against corruption as possible, assess contributions to securing the integrity of a blockchain. That is what proof-of-work and broadcast-replication are about: greatly sacrificing computational scalability in order to improve social scalability. That is Satoshi’s brilliant tradeoff. It is brilliant because humans are far more expensive than computers and that gap widens further each year.~Nick Szabo Money Blockchains and Social Scalability
While others are still stuck trying to scale computationally, there is the incredibly simple (in hindsight!) yet powerful observation that the inability to do so can be relied on by the markets.
The Decentralization of Exchanges
When bitcoin started out there was fear of a 51% attack. This attack can be neutralized by a Nash equilibrium amongst the mining pools. Until the then price of bitcoin is necessarily unstable as we should expect it to be affected at least in part by the psychology of the general citizenry.
As the mining pool parties limit towards a Nash equilibrium, which they will tend to based on the invisible hand, large fluctuations in price start to shows symptoms of the flawed exchange systems. The next stage then would be a Nash equilibrium between enough exchanges to create a stable decentralization.
After this one would expect the next important stage is to raise the price of bitcoin to a level that no other entity or wealth in the world could manipulate thus bringing a Nash equilibrium to this aspect of the “game”.~TWOC
Here Mt Gox is relevant as it was the only major exchange at its time. Those that only had a vague understanding of how exchanges work thought they were rich when the price skyrocketed only to find that the rising price was actually a signal that their bitcoins were lost indefinitely.
It’s only when the exchanges arise organically over time and are politically in conflict with each other (rather than colluding) that the exchange prices can be counted on. In such a setting if one exchange price begins to “inflate” then we can be assured that there is a problem with the political neutrality of the exchange (and/or the security of that exchange).
When we see exchanges support irrational and politically motivated movements we can always have faith that the exchange prices associated that are not shared on the politically neutral exchanges are fake prices:
Bitcoin Cash Provides No valuable Solution and Has No Founded Argument
Bitcoin was introduced as a new higher order medium of exchange that allows us to transfer utility in a politically neutral way the world has never known previously. It allows a very large and complex array of competing players to come to consensus where there would otherwise be none. For this it serves as the exact higher order solution that Nash alludes to. It creates a non zero sum game in which players gain together rather than one or some players gaining from exploiting another.
Bitcoin Cash does not do this and does not offer such a medium towards a higher economic equilibrium. It is a lesser solution of which we have 100’s and 100’s of comparable alt-coins that already exist. Bitcoin cash seeks to do what Visa can do but it does not have a vehicle to bootstrap its network. It doesn’t allow any players from bitcoin’s network to unilaterally deviate and gain and therefore it relies on irrational players that ignore their own utility functions in order to succeed.
Bitcoin Cash is Not Free Money
People say at the very least you should hold your private keys so you can sell your bitcoin cash. But what is bitcoin cash worth and how much should one sell it for? From another view we can ask, “Who would buy bitcoin cash?”
It is only irrational players that would do so, not even Ver or Jihan will exchange their bitcoins for bitcoin cash because they each rationally follow their own utility functions and they have nothing to gain from unilateral defection from bitcoin.
From another perspective we can ask where the value from bitcoin cash is expected to come from?
There is also a friction associated with bitcoin cash that is heightened by the fact that only nefarious exchanges will support an irrational proposal. Bitcoin cash costs mental energy in order to cash in (many bitcoin holders are severely confused and all they can discern is there is a great existence of disinformation). This mental energy cost plus the fact that there is no intrinsic value to the proposal suggests that no one can possibly gain from selling bitcoin cash.
Note On the Function And Make-up of Bitcoin’s Price
Another counterpoint to bitcoin cash I have not yet read is that as the market participants freeze their bitcoins and move them from exchanges the price of bitcoin will have increased pressure to rise because there will still be those that NEED to make legitimate bitcoin transactions and exchanges for bitcoin.
When so much of the market for bitcoin is frozen in fear bitcoin becomes more dear or from another view harder to obtain. This increased pressure causes more people to want it and the feedback continues.
This puts downward pressure on any possible bitcoin cash value and further causes rational agents to hodl bitcoin and sell bitcoin cash for bitcoin. Even those opposed to Core and pro bitcoin cash cannot rationally hold onto bitcoin cash over bitcoin for this reason.
There is no economic viability to bitcoin cash. There is no founded argument for its valuation. The exchanges and companies that support it are insecure and nefarious.