The game theory of Bitcoin and cryptocurrencies

cointelegraph.com:

The unique characteristics of cryptocurrencies make them an interesting subject for game theory analysis, as they can help explain the incentives and behaviors involved in trading and investing. This article discusses the concept of the prisoner’s dilemma, mining cryptocurrencies and blockchain forks that are relevant to the game theory of Bitcoin and cryptocurrencies.

Game theory is a mathematical framework that helps explain decision-making in strategic situations. Cryptocurrencies, like Bitcoin (BTC), have become a popular subject for game theorists due to their decentralized nature and potential to disrupt traditional financial systems. 

In the classic game theory scenario known as the prisoner’s dilemma, two parties must make a choice without knowing what the other will do. In the context of cryptocurrency mining, the prisoner’s dilemma can help explain why miners may act in their own self-interest, even if it is not in the best interest of the network as a whole.

The first miner to successfully solve a challenging mathematical equation receives fresh BTC units. Both computer power and energy usage are essential requirements for the mining operation. The tragedy of the commons, which happens when individuals prioritize their own interests over the needs of the whole, is one of the biggest obstacles in cryptocurrency mining. By mining cryptocurrencies, miners may put their individual financial gain ahead of the network’s overall security and stability.

A helpful foundation for comprehending this behavior is provided by the prisoner’s dilemma. In the scenario, two people are arrested for a crime, and they are offered the option to work together or turn on one another. If they both cooperate, their sentences are both