# How does game theory apply to blockchain?

07.02.2023
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How does game theory apply to blockchain?

Game theory in blockchain
Many developers often forget how important a role game theory plays in blockchain. In this article, we will look at what game theory is and how it affects blockchain and cryptocurrencies.

• WHAT IS GAME THEORY?

Game theory is the analysis of the logic of decision-making by participants in a particular system. A game, scenario or blockchain of a certain cryptocurrency can be taken as this system. It is based on mathematical models. The main components of game theory include:

Players - the individuals who take on all the decisions in a scenario.
Strategies - the actions taken by the players with a focus on the behavior of the other players.
Result - the outcome of the players' actions within the system.
Consider an example of a classic game theory scenario.

• AN EXAMPLE OF A GAME THEORY SCENARIO

A classic game theory problem is commonly considered to be the prisoner's dilemma or the criminal's dilemma. Its main essence is that all players can't interact 100% with each other, which is due to the personal interests of each player. Personal interests always outweigh general interests.

The principle of the prisoner's dilemma is as follows:

By convention, the punishment for a group crime is harsher than for a solitary crime. The criminal Vitalik and Satoshi are caught at the scene of the crime at the same point in time. Consequently, the police suspect that they acted in collusion. Then the two criminals are put in separate cells and put the following conditions on them:

If X gives up Y and Y does not testify, then X is released and Y goes to jail for 10 years.
If X and Y remain silent, they each get 1 year in prison.
If X accuses Y and Y accuses X, they both get 2 years in prison.
It is up to the prisoners to decide whether to keep quiet or to turn each other in. Collusion between them is completely ruled out by isolation.

The dilemma is that both criminal X and criminal Y are rational individually. They both choose to turn the other in, and consequently receive a two-year sentence. The solution to this dilemma is for both participants to remain silent. But they will never reach such a consensus, because there is a risk that, without prior agreement, someone might testify against his opponent.

In game theory, situations in which each participant acts according to his own advantage and victory does not depend on him (everything is decided by the decision of both players) are called Nash equilibrium.

The prisoner's dilemma itself can be used in relation to various real-world systems. For example, in decentralized networks to achieve consensus of multiple participants.

• GAME THEORY IN BLOCKCHAIN AND CRYPTOECONOMICS

In essence, cryptoeconomics can be described as a combination of economics, cryptography and game theory incentive systems, combined with decentralization. The main problem with such a system is to reduce the likelihood of fraud.

An example of how game theory is used in blockchain is bitcoin. For the system to continue to work stably and securely, it is necessary to take into account the error of the Byzantine generals, which is also part of game theory. All nodes must come to a common agreement on the state of the network without trusting each other. Such a condition is quite difficult to fulfill because it goes beyond cryptography (it defines the relationship between blocks, not the correctness of transactions and the main chain).

Bitcoin solves this problem by using a consensus "proof-of-work" or PoW algorithm. The model works in such a way that miners have to compete with each other to add a new block and receive a reward. The more miners concentrated in a network, the less chance that it will be attacked or hacked.

There is also a system of incentives. Miners do not just work for the idea, but are rewarded for their work. Accordingly, it is in their interest to increase the value of bitcoin in order to receive a larger reward.

To do this, they actively spend their resources (electricity), and if they decide to go against the network, all the costs will simply be in vain.

Blockchain is always in a Nash state, which is powered by the internal structure of the network itself. This makes it resistant to failures, because most will always work for the good of the network, rejecting tampering or false positives.

• HOW ADVANCED IS GAME THEORY IN BLOCKCHAIN?

It is difficult to say whether this or that game theory concept will work sensibly in new cryptocurrencies because their structure is very multifaceted. A large amount of research, experimentation, etc. is required for a reliable answer. - No one will check the theory in practice, risking the performance of the network.

However, the game theory itself does not stand still - with the development of blockchain and cryptocurrencies, there are more and more new concepts applied specifically in decentralized systems.

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