What is Game Theory & how is it applicable to Cryptocurrency?

Before diving into the application of game theory and how it can apply to cryptocurrency, first you need to make sure you have a solid understanding of the topic at hand. The interesting aspect of game theory is that it has both internal and external factors that can impact decision making.

What is Game Theory?

Game theory occurs in a competitive environment where one individual or company tries to gain a competitive advantage over their “opponent”. In essence, one person receives a benefit while the other is disadvantaged.

A good example of game theory would be in the airline industry. Airline companies are considered oligopolies, where there are a few different organisations that make up the whole industry. Over the last decade or two, the airline industry has blossomed, but lets take it back 20–30 years when there were far fewer airline companies. There a few different examples of how game theory could play out:

  1. If the various airlines made a mutual agreement to raise all of their prices to bring in more profits, they would all benefit.

2. The majority of the airlines sell their airline tickets at the agreed upon price, while just one (i.e. Delta) drops their price to bring in more revenue, giving them an increase in profits, while hurting the other airlines.

3. A different airline cheats (not Delta), to gain competitive advantage, while the others all consent to the mutual agreement. This would demonstrate that the network had two bad actors, Delta and the unnamed airline, which would indicate that the incentive gained from the “mutual agreement” was not aligned with all airlines.

Note: This isn’t something Delta did, just using it for example purposes.

Game Theory in Cryptocurrency

As stated before, we are able to see two different main impacts on cryptocurrency with game theory; both internal and external.

Internal Game Theory

Game theory in cryptocurrency all has to do with incentives within the system, both good and bad. If you break a rule within the algorithm’s system, there has to be a consequence that far outweighs the benefit. This is asymmetrical design, that disincentivises bad actors to work against a system. For example with mining Bitcoin, if a miner decides to attempt to double-spend a transaction, the block will end up becoming “orphaned.” Orphaned blocks occur when a miner tries to reverse a transaction by using enough hash power, and the block ends up not becoming part of the actual chain. This can also happen if multiple miners try to “double-spend” which would create a 51% attack. This means that multiple miners are working together to own 51% of the hash power on the Bitcoin network, not allowing for transactions to be completed.

These types of activities can be avoided on the Bitcoin network because if a miner attempts to do this, they will devalue their mining investment. In effect they lose their mined Bitcoins, and aren’t rewarded for completing transactions. Miners are incentivised to be good actors on the network - this is the essence of game-theory.

This internal form of game theory is avoided in not only Bitcoin, but in almost all cryptocurrencies. For example many tokens are built on PoS (Proof of Stake) instead of PoW (Proof of Work) and some use of a hybrid of both. When they stake their coin/token and do not complete something according to the cryptocurrency’s algorithm, they lose their staked coin, making them lose money. Again, they are incentivised not to game the network.

CanYa DAO

CanYa uses internal game theory in the incentive structure of the CanYaDAO.

A DAO is a Decentralised Autonomous Organisation, that allows a project to be self-governed and entirely decentralised.

The CanYaDAO will allow all CANApps to be scalable from a business logic and support backend, allowing any CANApp developer to connect global, 24/7 support to their CANApp. This removes the burden of funding marketing, operations, and support teams, letting the developer instead focus on building a great user experience for their CANApp.

The CanYaDAO has three Tiers: Agent, Admin and Core. Agents can be anyone who stake the minimum of CAN tokens required for DAO entry and perform basic tasks in the DAO.

Admins govern Agents, and perform higher level tasks in the DAO with wider consequences. As such, they require a higher stake, longer DAO experience and a threshold of reputation earned in the DAO. This ensures that all Admins have socially proved their alignment and commitment to the ecosystem.

Core is the final tier and is initially fulfilled by the CanYa Team. As the CanYaDAO matures, Admins may request to join the Core Tier by staking a much higher amount. This allows the CanYa Team to transition to a point where the CanYaDAO is governed and operated by DAO members - and achieves complete decentralisation.

Anyone at any time can leave the DAO and reclaim their stake. The stake is held to prevent rogue actors inside the DAO and incentivise long term alignment. Agents and Admins earn off tasks in the DAO, with the payouts for Admin tasks a lot higher than Agent tasks.

Staking structure of the tiered CanYaDAO

External Game Theory

In cryptocurrency, one of the biggest vulnerabilities that every organisation has — is born from external factors. The great thing about crypto is that the network can defend itself from internal vulnerabilities, but as it develops, it will need to improve itself at protecting against different forms of attacks. One of the classical examples of the need for external defence is the “Prisoners Dilemma” which states that two rational parties might not co-operate even if it appears in their best interests to do so.

One of the biggest threats for different tech organisations are DDoS attacks (Distributed Denial of Service). In 2017, we saw that 74% of all Bitcoin related websites were attacked by DDoS! This wasn’t only Bitcoin related sites, but also cryptocurrency exchanges.

As cryptocurrencies are built from code, it makes them completely algorithmic. Within their own coin, they can protect themselves against attacks, but at the same time, these various cryptocurrency communities grow; they become extremely social! Almost every single day you can go on social media, whether it’s Facebook, Twitter, Discord, or Telegram, and see different individuals talk about how Altcoin 1 is better than its competitor Altcoin 2, etc. By doing so, many people think that by degrading one, it will make the other rise in value. If you ever go on a website called StockTwits, you will see people anonymously trying to ‘shill’ or ‘debase’ certain coins - attempting to effect the price either higher or lower. Another example, if the owner of Mt. Gox decided that he wanted to try to make a lot of money from Bitcoin (more than he already has), he could leverage, and short Bitcoin right before selling off the coins from the Mt. Gox cold wallet. This could cause “FUD” (Fear, Uncertainty, Doubt) in the cryptocurrency community, making prices drop, allowing him to gain from it in the process.

What the Future Holds

Going forward, as cryptocurrency gains more traction in the real world, networks will need to be more aware of different methods of attack, and how to protect/secure themselves against them. In order to do so, networks will need to think like “attackers” (red flag strategy) and try to stay a step ahead of them because there are always people out there who will try to take advantage of the system. This is to be expected, and prevented by asymmetrical design of networks. No one really knows when mass adoption of cryptocurrency will take place, but it will be important to see how organisations and communities overcome these various obstacles to adoption through staking measures and other developing techniques that incentivise actors good and bad to support their network.

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