Game theory is fundamental to the development of cryptocurrencies and is one of the reasons why Bitcoin has managed to thrive for more than a decade, despite numerous attempts to disrupt the network.

So what is game theory?

Essentially, game theory is a method of applied mathematics and is used to study human behavior based on rational decisions. A "game" is designed as an interactive environment in which players attempt to act rationally in response to the rules of the game or to influence the decisions of other players.

The concept was originally developed in economics to study the behavior of enterprises, markets and consumers, but now it has been widely used in various research fields from all walks of life. Therefore, game theory models can be used as a way to detect, in experimental situations, the underlying behavior regarding potential interactions and the possible outcomes of their behavior, in terms of predictive reporting definitions. These models can also be applied to a wide range of studies in politics, sociology, psychology and philosophy.

Prisoner's Dilemma

The Prisoner's Dilemma is the most popular of the game theory models One example. It describes a scenario: when two criminals (A and B) were arrested and taken separately to separate rooms for interrogation. Two criminals were interrogated while unable to communicate with the other criminal.

Prosecutors will try to persuade criminals to testify against each other to reduce their charges. If A testifies against B, he is released and B is arrested and sentenced to 3 years in prison (and vice versa). However, if they both betray each other and testify against each other, the result is that they will both be arrested and sentenced to 2 years in prison. In the end, if both A and B decide not to betray each other and keep quiet, they are only sentenced to 1 year in prison due to lack of sufficient evidence.

In this scenario, we would have the following possible outcomes (based on their personal decisions):

Obviously, A (or B) The best-case scenario is to not betray each other and be released, but this requires the other party to remain silent, and we cannot predict what decisions each will make. Faced with better rewards, many rational prisoners may choose to act in their own self-interest and betray the other side. But if both A and B betray they will be imprisoned for 2 years, which is not the best outcome. Therefore, for this pair, their best option is to remain silent and get only 1 year in prison instead of 2 years.

There are many variables to the Prisoner's Dilemma, but this simple scenario illustrates how we can use game theory models to study human behavior and the process of rational decision-making and its possible outcomes. idea.

Game theory and cryptocurrencies

When applying game theory to cryptocurrencies , game theory models play an important role in designing secure and trustless economic systems (such as Bitcoin). The creation of Bitcoin as a Byzantine Fault Tolerant (BFT) system is the result of a harmonious fusion of cryptography and game theory.

The use of game theory in the context of cryptocurrency is an important fundamental concept for the crypto economy. It is basically the study of the economics of blockchain protocols and the possible consequences of the design of these protocols. potential consequences - based on the actions of their participation. It can also take into account the behavior of "external agents" that are not the behavior or true part of the ecosystem and end up joining the network and trying to disrupt it from within.

In other words, the cryptoeconomic system is activated by rewards provided by the protocol to examine the behavior of nodes on the network and consider the final most reasonable and possible decision.

Since the Bitcoin blockchain is designed as a distributed system - with many nodes distributed in different locations - it needs to rely on these nodes for transaction transactions and block verification. Achieve consensus. However, these nodes cannot actually trust each other. So how to avoid malicious activities in such a system? How can the blockchain be protected from being destroyed by dishonest nodes?

One of the important features that protects the Bitcoin network from malicious activity is the proof-of-work consensus algorithm. Its use of cryptography makes the mining process costly and demanding, creating a highly competitive mining environment.

Therefore, the structure of a cryptocurrency built on a PoW system has a greater incentive for mining nodes to work honestly (so they do not risk any loss of invested resources). On the contrary, any malicious activity will be quickly dismissed and punished accordingly. All mining and expansion nodes that exhibit dishonest behavior may lose a lot of funds and be kicked out of the network. Therefore, the most rational and reasonable decision for miners is of course to act honestly and ensure the security of the blockchain.

Conclusion

In summary, the general application of game theory is to simulate and verify human behavior methods, and choices made based on rational thinking. Therefore, game theory models are often considered for use in designing distributed systems, such as cryptocurrency.

Based on a balanced combination of cryptography and game theory, the proof-of-work consensus algorithm can allow the Bitcoin blockchain to establish a decentralized economic system that is highly resistant to attacks. The same goes for other cryptocurrencies, and the concepts of game theory also apply to PoS blockchains. Their main difference is the way the Proof of Stake blockchain handles transactions and verifies blocks.

But please note that the security of the blockchain and the resilience of the block are directly related to its protocol and the total number of participants in the network. Larger distributed networks are more reliable than smaller distributed networks.