What is Game Theory?
Game Theory is a branch of mathematics that is associated with behavioral sciences and quantification of decision-making. It studies how participants in a given social contract or competitive environment behave and interact with others with regard to internal and external factors. Game theory is used to study and understand various areas of everyday life.
The concept of game theory initially branched out of economic studies to study the behavioral aspects of businesses, trading, markets, sales, and buyers etc. Therefore, game theory is also used in cryptocurrency sector to discern various aspects such as blockchain operations, trading dynamics, economic implications, and profit feasibility of a new project etc.
The fundamental structure of game theory provides an insight into various aspects such as actions, reactions, course, and discourse of relevant participants and its impact.
Important Terms of Game Theory
Payoffs
Payoffs is a reward that one or more player collects at the end of the game.
Information Set
The information set indicates all the available data available at any given point during the game.
Nash Equilibrium
Equilibrium happens when both players have finalized their decisions and created an outcome. Nash Equilibrium is a state where outcome of the game becomes absolute. It means that players cannot change the outcome by making unilateral changes.
Types of Game Theory
Cooperative and Non-Cooperative Games
Cooperative games are instances where players are able to device winning strategies with discussions and negotiations. Non-cooperative games are where players create and implement playing strategy on an individual basis.
Normal Form and Extensive Form Games
Normal-form games are when players can put individually created strategies in a pool to share with other participants. This is also a method to calculate Nash equilibrium. Meanwhile, extensive-form games are where decisions are arranged in a tree that represents a discourse based on different choices players make at different points during the game.
Simultaneous Move Games and Sequential Move Games
Simultaneous move games are where players have to make impactful decisions at the same time since they are not aware about the strategies of other players. Sequential move games are where players are also unaware regarding the playing strategy of other players but base their strategies based on the behavior and reactions of other players.
Constant Sum, Zero-sum, and Non-Zero Sum Games
Constant-sum games are where the final outcome of the game remains constant regardless of the individual deviations of the players. Zero-sum games are where there is one clear winner and loser and the total outcome is always zero. However, cooperative or non-zero-sum games are where all parties can win or lose at the same time.
Symmetric and Asymmetric Games
Symmetrical games allow players to use a uniform or symmetrical strategy. This is possible for short-term games only since they have minimum amount of variations. On the contrary, long-term games that can have various twists and turns require ad hoc or asymmetrical strategy.
Types of Game Theory Strategies
Maximax Strategy
Maximax strategy does not add any hedges and require players to go all in or all out.
Maximin Strategy
Maximin strategy is where players get to pick best out of worst options available.
Dominant Strategy
Dominant strategy is where players pick the best strategies irrespective of how other players are doing.
Pure Strategy
Pure strategy is when players make least amount of effort in devising a winning strategy since it is unaffected by other players and other factors affecting the game.
Mixed Strategy
Mixed strategy is where participants in a game take a deliberate and proactive approach to make decisions to ensure victory.
Use of Game Theory in Blockchain
Blockchain developers formulated its governance model based on Byzantine General Problem called Byzantine Fault Tolerance or BFT. The BFT system uses the game theory concept of Byzantine General Problem to ensure cooperation between independent blockchain participants such as nodes and miners.
At the same time, cryptocurrency investors can use game theory strategies to refine their investment plans, manage risks, analyze market changes, and maximize profits.
Conclusion
Game theory can be an effective model for developers, analysts, and crypto investors to get the best results and create a better understanding of the respective tasks.
