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Game Theory in Cryptocurrency

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The article “What is Cryptocurrency Game Theory: A Basic Introduction” by Blockgeeks describes how game theory prevents cheating in the Bitcoin community. Bitcoin transactions can be represented by a blockchain in which each block contains a transaction of currency and a hash of the previous block, linking them together to create a blockchain. In class, we learned about the setup of game theory models. There must be three components: players, strategies, and payoffs. When applying the game theory model to Bitcoin blockchains, there are two players, users and miners, and each have only two available functions, send coins or receive coins. Their payoff is the amount of Bitcoin they receive. Miners find and add blocks to the blockchain.

There are possible ways for miners to cheat. For example, a miner could create an alternate block, allowing them to “double spend” by creating blocks on the alternate chain and mine extra Bitcoin. However, the blockchain is designed in a way such that blocks mined on top of invalid blocks become invalid, resulting in the miners mining on the main chain. Also, if a miner was to create a sub-optimal scoring block, other miners would choose to mine on other blocks with a higher score. Theoretically, if all miners were to somehow coordinate and mine on an alternate block, they would receive a higher payoff, but they are more safe mining on a block in the main chain since they can’t know about the actions of the other miners. And users are more likely to use main blockchains because they are more used to it and it is a simpler option.

This is similar to the prisoner’s dilemma we discussed in class. If both prisoners were to lie, they would have the greatest possible payoff. However, this is riskier because if one lies, it is in the other’s best interest to confess, and if the other ends up confessing, the one who lied will have a significantly lower payoff than if they had confessed. So the Nash Equilibrium ends up being for both prisoners to confess, even though they both have a worse payoff in this case than if they were both to lie.

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