What is Game Theory? And How Does it Relate to Cryptocurrency

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.

What Is Game Theory?

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.

In a typical game theory scenario, there are 3 primary components.

  • Players
  • Strategies
  • Outcomes

Players are the users that make decisions. Strategies are the maneuvers that players make while simultaneously taking into account potential strategies of other players. The outcomes are the result of the players’ moves within the system, and with the right incentive mechanisms, can be driven to a certain direction or played out repeatedly with similar outcomes.

The Prisoner’s Dilemma

To better demonstrate this, the prototypical example of game theory that you probably have heard of is referred to as the Prisoner’s Dilemma. In this scenario, there are two prisoners being interrogated separately for a crime that they are both…

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