Game Theory and Blockchain

Game Theory is a concept applicable to adaptive systems, these systems are composed of adaptive agents which the game theory tries to understand and model.

3 major components of any game of interest are players, strategies, and payoffs. Typically games are represented in a matric form or tree diagram.

Zero-sum games are the games where the sum of player playoffs always add up to the same value, here one person's loss is another person's gain (eg: Chess, Bocking, Car Race). The agent's payoffs here are negatively correlated. Non-Zero-sum games are the one where the total value to be distributed increase or decrease depending on the degree of cooperation between the agents/actors who are part of the game (eg: Trade of goods between nations). In the present world, the cooperation is generally enforced by the  centralized authorities like law/governments/institutions. Now with the invention of Blockchain technology, this trend of cooperation enforcement is changing where technology is enabling peer-to-peer interaction and cooperation via feedback mechanisms, token economics, and network effects.

The agents of interest in the game are always believed to behave rationally. Rationality is nothing but acting according to a consistent set of rules based upon some value system that provided the reason for the acting, in this kind of game setup, rational agents have unlimited rationality which means they know all relevant information while making a choice, within this model, agents have perfect information and in this model, agents behavior is seen as the optimization behavior over the set of possibilities in the game. In a perfect setup, the agents involved with perfect rationality always achieve the maximum payoffs but in a real-world scenario, the predictions of the game theory and the observed behavior of the people actually differ dramatically, people in real world operate with the multiplicity of motives.

In any Non-Cooperative game (Eg: Prisoner's Dilemma) the concept of interest is to find the Nash Equilibrium strategy, here a player will always play that strategy no matter what other person's choice or strategy is because that is the best option given the scenario of the game. Unlike in Non-Cooperative games where the sole focus is on the payoffs to the individual and searching for stable equilibrium solutions Cooperative games, however, add an extra dimension to the setup, now one has to think about the payout to the whole organization. Here, instead of individual payoffs, we have to look at the positive and the negative externalities the actions may have on the whole system.

The topic of interest for permissionless blockchain-based platforms will be Cooperative games ecosystems, the blockchain-based platforms are to be designed keeping the concepts and the pitfalls associated with the cooperative environment. Social Dilemma is one such concept, in this scenario, the self-interest of an individual is at odds with the collective interests of the group, at the heart of the social dilemma, at any given decision point, individuals receive higher payoffs for making selfish choices than making the cooperative choices. No one realizes this fact that "everyone involved will receive lower payoffs if everyone makes selfish choices than everyone making cooperative choices". The point is no one has an individual motive to change their behavior even though everyone will be worse off. The solution to solve the social dilemma problem can be searched deep into the applications of Blockchain. Here the technology has to increase the connectivity between the agents and potentially achieve a higher degree of interdependency between them. Creating positive interdependency between elements in the systems can be achieved by designing sustainable incentive mechanisms in the system.

In viewing the concept through the lens of Social Dilemma, we arrive across the 'Tragedy of the commons problem where every individual is acting for once own self-interest and are consuming the resources at the expense of the others if this trend gets followed by the masses more harmful effects can be seen or observed in the later stages. A mechanism to be designed in such a way that any such behaviors to be discouraged and the desired behaviors are encouraged by punishment and incentive mechanisms respectively. The individual's choices have costs that do not fully bear themselves as they are externalized to the overall organization. If the negative externalities are more than positive externalities then the organization will degrade over time.  So, the central issue is in solving the Tragedy of the commons is by reconnecting the costs of individual actions on the whole with the cost they pay individually when the individual always pays the full cost for his actions then there is no social dilemma and we can have a self-sustaining organization. When interconnectivity between the members within the game improves so typically the interdependence also improves this changes, the nature of the game, for eg: health caution sign on the cigarette pack makes us think twice before lighting a cigarette, here communication is a form of connectivity. The cooperation between the members decreases when the group size increases, so the new mechanism designs should factor this fact in creating decentralized cooperative groups.

Finally, since these Blockchain-based solutions are tech-based, the mechanisms designed should be dynamic in nature where the data created from the system to be used for systematic analysis to make the necessary changes in the systems infrastructure so that evolutionary stable strategies can be reached.