Understanding the Game Theory Behind Ethereum
Ethereum, a cryptocurrency, uses game theory to back up their blockchain and create security for users. The article gives a brief overview of what game theory is and how it works. It also briefly gives an example of the prisoner’s dilemma, a similar example to the ones in class. They discuss what cryptocurrency is and how with no centralized authority they can still monitor and influence the system. Through Proof of Work (PoW) and Proof of Stake (PoS) the blockchain creates incentives for users to play by the rules. The article shows how game theory is at the center of it all and its importance especially in cryptocurrencies.
This article relates to what we learned in class in numerous ways. It highlights how cryptocurrency is a prime example of how game theory and nash equilibrium can be useful in creating trust. The blockchains don’t have any central authority to control the users actions. However, knowing the tendencies of game theory and how each user (or player) essentially wants the best possible outcome for themselves it can be predictable what users will do. Users trust that each other will do a certain action because if one person cheats or tries to scam another, the whole credibility and value of the currency could be hurt and no one would benefit. These conditions incentivize individuals to play a certain best response which will be the nash equilibrium and ultimately benefit the entire network. This connects back to class when learning about the prisoner dilemma and nash equilibrium. “To date, Ethereum has relied on the Proof of Work (PoW) consensus algorithm, which protects the blockchain from malicious activity by using cryptographic mechanisms (i.e., hard math problems) that make the mining process demanding and expensive.” By increasing the risk of failure this creates a larger incentive for users to make the “right” decision and play fairly. In addition, this constructs a security for the blockchain and when miners repeatedly make good and just decisions the credibility and reliability of the chain is strengthened. Also the Proof of Stake (PoS) which claims “validators must stake a minimum of 32 ETH (about $50,000 as of this writing) to run a node.” If they try to write a bad block they risk losing and forfeiting their staked ETH. This is another method to make sure in the network the nodes are valid and strong, which ultimately strengthens the entire network as a whole.
Link to article: https://www.bitcoinmarketjournal.com/game-theory-behind-ethereum/