Cryptocurrency and Game Theory
https://blockgeeks.com/guides/cryptocurrency-game-theory/
Nearly every piece of software can be hacked. Some are certainly more difficult to hack than others, but most are still hackable to some degree. While some technologies have yet to be hacked such as RSA cryptography, there is almost always a system built around such technologies which is weaker and can be broken into.
Cryptocurrency is a form of digital currency which is regulated using encryption. When creating (mining) a new “block” of currency, it is linked to the most recently produced block, so theoretically, there should one one singly linked list that composes the entire chain of blocks (aka the blockchain). However, it is possible to create an invalid block and end with more currency one should by creating a new chain stemming from the original. While encryption prevents many types of unfair manipulation of the system, it cannot prevent some forms of manipulation such as this one.
This is where game theory comes in. The cryptocurrency was built to enforce a “recursive punishment” system, where as soon as the system is broken, any currency that was produced using the invalid chain is also considered invalid to the original chain. Like any currency, the invalid chain could theoretically have value if enough people consider it to have value, but game theory suggests this will never occur. Since the new chain is considered invalid, each individual has a higher payout if they mine on the main blockchain instead. For the side chain to have any value, a majority of the rest of the miners would need to start mining the side chain as well. So although encryption can almost always be circumvented, human nature cannot.
This system takes advantage of a Nash Equilibrium to predict the choices made by miners. As described in class, it can essentially be assumed that given a large group of people, most of them will choose where the Nash Equilibrium lies. Yes, if a majority of the population switched to the invalid currency, those miners would receive additional currency value, but no individual can be sure of what everyone else will choose, so they will likely each stick with the main blockchain of the cryptocurrency.