Game Theory

Written by Evan Feng

Introduction

Game Theory is a catch-all term for the scientific study of strategic interactions between rational players. The most commonly cited example points to the thought experiment of the prisoner’s dilemma, though optimal strategies may differ depending on whether a game is played once, or repeatedly, and whether there are just two participants or more.

The study of game theory is inherently multidisciplinary, and can include formal mathematical modeling, behavioral finance, psychology, and other social sciences. Further, experimental research has demonstrated that even assumptions of rational agents must be made with great care when considering incentive mechanisms, as actual humans come with a whole suite of cognitive biases that result in deviation from fully rational automatons.

Within the context of digital assets, game theory is an underlying discipline behind the incentive structure of almost all cryptocurrencies and tokens. Whether you’re talking about the motivation for miners to operate honestly instead of maliciously to secure Proof of Work chains, or for validators to perform their duties as intended in order to safeguard their bonded stakes (for protocols where node rewards can be slashed), game theory can be thought of as the mechanism through which robust token economics are conceptualized and then implemented to reward the types of constructive behaviors necessary to bootstrap and scale a given project.

Suggested Reading

Beginner’s Guide to Game Theory by Michael Karnjanaprakorn