What is Cryptocurrency Game Theory: A Basic introduction

Ameer Rosic

2 years ago
What is Cryptocurrency Game Theory: A Basic introduction


What is Cryptocurrency Game Theory? One of the greatest innovations of the 21st century is, undoubtedly, the advent of cryptocurrency.

What is that makes the blockchain technology such a breakthrough? Let’s look at the real world and how fiat currency is maintained and stored. No matter who you are, your money is going to be stored in a centralized location, i.e. the bank. The problem with this model is that you are giving your money over to an entity and it is at the risk of getting compromised because of a variety of reasons. The blockchain solves this problem by being completely decentralized and corruption free internally. The way it achieves this is by the incorporation of cryptography and game theory.

What are market structures?

Market Structures

 

Before we understand the concept, we need to go through some basics first. The organization and fundamental characteristics of any market are called market structure. The market structures are differentiated based on many factors like a number of producers, control over prices and barriers to entry. Based on these factors, there are four different kinds of market structures:

  • Perfect Competition.
  • Monopoly.
  • Monopolistic Competition.
  • Oligopoly.

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Perfect Competition

Perfect competition is a market place where it is easy for anyone to get into the market and individual sellers don’t have any power over the price of the product. Think of mangoes. It is easy for anyone to get into the market, all that anyone has to do is to grow mangoes. Plus, they can’t willingly change the price of the mangoes. If one person sells a mango for $10 then the buyer can simply buy it from someone who is selling mangoes for $5.

Monopoly

A monopoly is the polar opposite of a perfect competition. This is a market place which is dominated by one corporation and the barriers to entry are so high that nobody else can enter it. De beers diamonds are a great example of a monopolistic market.

Monopolistic Competition

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This is a marketplace which has a lot of sellers and very low barriers. Their products are similar but not really identical. Think of the pizza delivery service. Now, dominoes and pizza hut have the same product with subtle differences. Obviously one can slightly price their product a little higher based on factors like customer preferences. However, if dominoes price their pizzas way too high, then people will simply go over to pizza hut. Consequently, if dominoes and pizza hut both start overcharging, since the barriers to entry is so low, another player can come in and take all the customers.

Oligopoly

Oligopolies are market places which are dominated by a few markets and the barriers to entry are high. One of the best examples of an oligopoly is the smartphone market. The market is dominated by few number of companies like Samsung, Apple, and Huawei. Much like monopolistic competitions, the products are similar but not identical. While this does give them some control over their prices, they don’t really have much of a leeway. If tomorrow, Apple decides to price their iPhones at $4000, apart from the Apple fanatics, most will simply opt for an Android phone. Obviously, they can always get together and decide as a group to mutually increase the prices, but this is called “collusion” and is illegal in many countries, including the United States.

So, when they can’t compete by changing prices, how can they get that edge over their competitors? They do so by “non-price competition”, which means competing without changing the price. How do they do that? They do so by changing the look and style of their products and giving a unique experience. However, the most recognizable form of non-price competition is advertising.

Advertising is one of the most effective ways of showing unique qualities of your products and to introduce new products. But then again, there is a problem. How many of the advertisements do you watch actually stick? Chances are that you have been bombarded by tons of ads today itself, how many of them do you actually remember? If you are a player in an oligopoly and you keep blindly advertising, you are going to be spending a lot of money.

As a result of that, in order to make up all that money, you are going to invariably have to increase the price of your products. If that happens, your buyers are simply going to go to your competitors. So how do you go about this? How do you advertise your products without losing out on your customers? You will have to basically take decisions based on the actions that your competitors will take. In order to do that, you will have to use Game Theory.

What is the Game theory?

What is Cryptoeconomics? An Intro to Game Theory

Game theory is the study of strategic decision making. This is how many corporations make decisions while keeping in mind the actions that their competitors will take. Game theory was devised by