What is game theory in bitcoin

Game theory is highly relevant to cryptocurrencies and is often an overlooked aspect of platforms, despite playing a vital role in their security and sustainability. A renewed vigor in game theory development and analysis has coincided with expanded interest and focus on developing cryptocurrency platforms. This has led to a interesting new field called cryptoeconomics, and the fundamental role that classical and contemporary game theory models play in it is vital to understanding the primary dynamics of interactions between players in cryptocurrency platforms.

In order to be able to fully comprehend the role that game theory plays in cryptocurrency platforms, you need to actually understand what exactly game theory is and how it can be applied to a vast array of scenarios. Simply put, game theory is the study of logical decision making made by players within the defined parameters of a system game, scenario, etc. It uses mathematical models and can be applied to economics, psychology, logic, computer science, distributed systems, and more. Game theory can be seen as a microcosm of human behavior under set circumstances wherein certain incentive structures and mechanisms can lead to predictable and honest behavior by players.

Players are the users that make decisions. Strategies are the maneuvers that players make while simultaneously taking into account potential strategies of other players. In this scenario, there are two prisoners being interrogated separately for a crime that they are both equally guilt of.

Both Alice and Bob are offered an opportunity to confess and receive a reduced sentence. This results in the 4 possible outcomes laid out in the table below. As you can see, the overall solution with the least jail time for both prisoners is for both prisoners to remain silent and not confess. This option is highlighted in blue in the bottom right corner. However, this outcome is considered unstable as it makes an assumption that both prisoners will knowingly leave a better deal on the table where they could potentially receive 0 years and be set free if they confess and the other prisoner does not.

Consistent game theory model outcomes and behavioral psychology tell us that this outcome is highly unlikely, as rational players will inherently betray the other due to self-interests. In game theory, the solution to a game where each player chooses their optimal strategy given the strategy was chosen by the other and they have nothing to gain by shifting their strategy is known as Nash Equilibrium.

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This is a stable state and is represented in the top left corner of the chart. This results in the ability of non-zero sum games to be either non-competitive or competitive as compared to zero-sum games that are strictly competitive. In distributed systems, this concept is paramount to maintaining trustless consensus models and has important ramifications when applied to cryptocurrencies in the context of crypto economics as you will see. Cryptoeconomics can be defined as the combination of cryptography, economics, and game theory incentive models incorporated into distributed blockchain protocols in order to create a secure, stable, and sustainable system.

It is a very new concept, but when you really dig deep into the functionality of cryptocurrency platforms, you will see how important it is to mitigating malicious actors and promoting honest, trustless behavior across the network. The best example to understand the role of game theory and cryptoeconomics in cryptocurrency platforms is Bitcoin.

In order for distributed blockchain networks like Bitcoin to remain secure and have the ability to reach the necessary consensus on the blockchain, they need to remain Byzantine Fault Tolerant.

For the system to remain Byzantine Fault Tolerant, the decentralized nodes have to come to a majority agreement on the current state of the blockchain without trusting each other. They must leverage their strategies such that they may maximize their utilities in the long run. As mentioned above, the interaction between rational parties and protocols in blockchain can be modelled as a tragedy of the commons game, especially in pool mining refer to Section 4. In , Nick Szabo put forward the concept of smart contract. Then the smart contract will be executed automatically when the conditions are triggered, where no participants can bias the contract commitments.

Smart contract can be automatically executed without prior review, which may avoid intractable issues such as contract disputes [ 12 ]. However, smart contract has not been applied to the actual industry due to the lack of effective technical support and trust platform. Ethereum provides an implementable development platform for smart contract by drawing on the characteristics of blockchain technology such as decentralization, nontamperability, process transparency, traceability, and so on [ 15 ].

Ethereum offers complete scripting language of Turing, which can embed more additional information.

Therefore, any smart contract, once precisely defined, can be constructed and implemented automatically on Ethereum. The security problem of smart contract can be summarized into two aspects: internal security and external attack. Luu et al. Kosba et al. Bhargavan et al. Atzei et al. They focus on the robustness of contracts and categorize programming pitfalls in the programs.

Dika categorizes the vulnerabilities of smart contracts [ 20 ]. Furthermore, they analyse code security issues in smart contracts on the Ethereum, such as Oyente, Security, and SmartCheck. Recently, Nikolic et al. In addition to the inherent security problems in smart contract, there are also many attacks specifically targeting smart contract. Velner et al. Juels et al. Criminals can use smart contracts to carry out some illegal activities, such as illegally selling pirated films.

They focus on discussing the feasibility and harmfulness of criminal smart contracts. Finally, they appeal to the introduction of relevant laws and policies to improve technical prevention measures. Brunoni and Beaudet-Labrecque also have in-depth discussions on how to use smart contracts to commit cybercrimes [ 24 ]. Alharby and van Moorse even think there are no countermeasures to criminal smart contracts at present [ 25 ]. Furthermore, scholars are trying to resist the negative effects caused by smart contracts. Wang et al. They prove that, given proper parameters, the successful probability of criminal intelligence contract is extremely low [ 26 ].

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Zhang et al. Bigi et al. They mainly analyse the uncertainty brought to the system by the deposit introduced by the smart contract. Consequently, they address the validity of smart contracts. Although smart contracts are not perfect and secure, they still have wide application. Dong et al. They assume that both the client and cloud are rational participants, where the former strives to maximize their benefits by providing the correctness of the calculation results. Figure 2 presents the future directions for smart contracts based on the above related works.

The environment for smart contracts must be more complex and practical. However, the application of game theory in the field of economics has become extraordinarily mature. Therefore, it is natural to analyse some problems in bitcoin and the blockchain from the perspective of game theory. As we all know, the most important mechanism in bitcoin is mining. Tschorsch and Scheuermann provide the basic concepts and workflows of bitcoin [ 30 ].

If miners want to get bitcoin, they need to solve a specific mathematical problem. That is, miners, who solve the problem and find a bitcoin block, can get By February 5, , the value of a bitcoin is However, it requires a certain amount of computing power to solve these problems. It usually takes several months or even years for a single miner to find a bitcoin block. Normally, a new block will appear on the bitcoin network in about 10 minutes. Therefore, most miners work in vain.

For this reason, some miners constitute a mining pool by taking their computing power as a whole. If they find an effective block within a proper time, they will share the rewards according to their computing power. However, toward the view of game theory, miners may achieve additional rewards by leveraging the security vulnerabilities in the incentive mechanism.

Therefore, rational miners have incentives to deviate from the honest strategy, which is similar to the noncooperative game in game theory. Schrijvers et al. In the mining pools, miners can strategically choose the time to report once they find a new block. They present three properties of the payment function: a incentive compatibility, b proportional payments, and c budget balanced BB.

Proportional reward function, denoted as R prop , refers to the allocation of rewards according to the computing power of each miner, which is an earlier allocation strategy for the mine pool.

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However, R prop only meets the properties of b and c. Eyal and Sirer highlight the incentive compatibility of bitcoin protocols [ 32 ], where miners are allowed to collude. They prove that rational miners will eventually turn into selfish miners who collude to form a selfish pool. On the other hand, the pool can attract an increasing number of selfish miners. Therefore, the pool may develop into a super pool consisting most miners in the whole system. As a consequence, bitcoin becomes a centralized system again, which goes against the original intention of bitcoin.