Game theory in cryptocurrency, explained | RP 100

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Game theory in cryptocurrency, explained

Game theory is the mathematical study of optimization between rational individuals in a zero-sum world.

In other words, game theory is about how we define winning. And winning is usually about who holds the most power.

On the Internet, the agents who win are the ones who command the most attention.

• Algorithms are programmed to favour content that make people click.

• Celebrities who have millions of followers get brand deals, revenue, and “billionaire influencer” status.

• Sensational news stories dominate our headlines.

Behind these tactics are the Internet companies who program the code and who profit off of our attention.

Companies hold the power on the Internet

In their early days, now-large Internet companies needed to align incentives with their users to grow their customer base.

• Twitter allowed people to share their opinions and photos of their avocado toast, and grow their audience.

• Instagram allowed users to share a curated version of themselves, become famous, and monetize their interests.

• Facebook allowed us to share text, images and video updates with friends and family who lived far away.

Once these platforms hit scale, they needed to turn a profit. They began selling user data to advertisers.

Instead of focusing on features and innovation, they began optimizing for clicks, views, and watch time.

a16z partner, Chris Dixon, uses the innovation adoption curve to illustrate this point.

He writes:

In order to monetize, corporate interests stop aligning with that of their users

Some of us do not want our data sold under any circumstances.

Some of us are OK with some of our data being sold if we receive compensation for it.

None of us are OK with our data being exploited without our consent.

But this is what’s happening right now.

Because the current iteration of the Internet has no native way to extract value, platforms need to go to the dark side to grow.

Social media companies have gone from attracting users to extracting from users.

Growth for them, has become less about cooperation with users, and more about competition against them.

Platforms that join the dark side and sell user data for profit — Facebook, Google, Amazon, etc. — flourish.

Platforms that don’t — MySpace, Yahoo! — flounder. They eventually become acquired by a dark side platform or fade into irrelevance.

Bitcoin, blockchain, and the web3 movement are trying to solve this problem of misaligned incentives.

The network holds the power in Bitcoin & blockchain

At its core, Bitcoin is about enabling a easy, cheap, and fast way to transfer digital money from one individual to another. As a result, web3 is about an Internet that has payments natively built in.

This allows blockchain builders to create networks that making it valuable for Internet participants to act in the interests of the common good.

Bitcoin’s proof of work consensus mechanism means that miners — the owners of computing power — are rewarded BTC and thus, given power in the network.

Ethereum’s proof of stake consensus mechanism rewards owners of coin. These network participants stake ETH, aligning themselves with the long-term health of the network.

Blockchain consensus mechanisms align incentives. They discourage bad behaviour and keep users playing positive-sum games.

In blockchain, the network holds the power.

😉 You're welcome

A selection of interesting links & fun recommendations.

• 📚 Pachinko by Min Jin Lee. From Amazon: “Richly told and profoundly moving, Pachinko is a story of love, sacrifice, ambition, and loyalty. From bustling street markets to the halls of Japan's finest universities to the pachinko parlors of the criminal underworld, Lee's complex and passionate characters--strong, stubborn women, devoted sisters and sons, fathers shaken by moral crisis--survive and thrive against the indifferent arc of history.” 
  
  I started this book yesterday… And it pulled me into the story from the first page. I haven’t finished it, but I’m ready to recommend it. It’s that good.

• 🛠️ Peak Design Packable Tote. I’m wrapping up a 6-week trip in Asia and this is a new constant in my packing list. I throw it in my carry-on and pull it out when I’m at the beach, on an unplanned shopping trip, or just need a bag to put my jacket in. My favourite feature? It packs down smaller than the size of my hand.