Bitcoin’s Game Theory Is Not Cut And Dried

The often-cited idea is misunderstood in the context of how the world interacts with Bitcoin as a whole.

Game theory is the science concerning the systematizing of strategic conflict and cooperation among rational actors. It was formalized in the mid-40s by the genius polymath John Von Neumann, and then it allegedly found its way into all kinds of science, even though the only people talking about it are venture capitalist types like Balaji Srinivasan using it in word salads to make simple things sound very complex.

When game theory got a little pop culture notoriety with John Forbes Nash Jr.’s depiction in the 2001 biographical drama “A Beautiful Mind,” it somehow became one of those things that people thought could be utilized as a life hack without ever really understanding it, like nootropics and magnetic bracelets. No, seriously, what are nootropics?

To be fair, plenty of things can be appreciated just by reading their Wikipedia entries, but that does not an international affairs expert, nor a set theorist, make. Not everything is a perfect instance of the prisoner’s dilemma, or a tragedy of the commons, or a game of chicken. Again, unless you’re in Silicon Valley and wearing those ugly thousand dollar tennis shoes they all wear.

A game needs, at the very least:

1. Rational actors: players who have specific goals and act in order to achieve them

2. A set of finite and well-defined actions players can make

3. A set of finite and well-defined possible countermoves to those actions from every other player

Games are made challenging and/or complex by:

1. Determining a player’s goals with certainty

2. Iterating a player’s possible “moves” given an adversary’s move, especially if it’s a continuous game with no clearly-defined end state. This can very quickly get bogged down in probability and Bayesian theory.

3.Determining how much information each player has at any given moment

This is why game theoretic simulations for even moderately complex systems are frequently computer-based.

Enter Bitcoin. Which is to say, enter the space where Bitcoin, Bitcoiners, and others reside adjacent to it. Game theory is a frequent rebuttal/reason, wielded with a high level of confidence, for some actor doing this or that, or for hyperbitcoinization to be an inevitability. This is presumably because Bitcoin has rules which are extremely defined, very hard to change, and which generally encourage cooperation. But it’s not that simple.

We really have (at least) three sub-games going on, in which the actions and outcomes in one can potentially affect the actions and outcomes in another:

1. Acting within Bitcoin. This most closely resembles a cooperative symmetric game, where agreements are enforced by a third party, which in this case is the protocol itself, and the identity of actors is less important – again, because of the protocol.

2. Adopting Bitcoin. The decision to step into number 1.

3. Interacting with Bitcoin outside of it.

Let’s dig deeper.

The game theory of acting within Bitcoin is inarguably the most concrete of these. It is set by the code, which is extremely difficult to alter, and is extremely costly to manipulate. This high cost, translated as censorship resistance and security, is a large portion of the value people find in Bitcoin. The predictability of particular actions by particular actors is extremely well-known. As the network becomes more robust and mining becomes more decentralized, this almost isn’t even a talking point anymore. Bitcoin will soon become denser than iridium, and finding some leverage against it will be largely infeasible.

The game of adopting bitcoin, although admittedly I’m using the term a little more loosely here, is where things start to get interesting. The power structures that exist within national governments and the legacy financial system have been perpetuated largely due to immoral actions, such as predatory lending, questionable wars, the petrodollar, cronyism, and the revolving door between them all. Maximal personal liberty and the current socioeconomic and political climate are mutually exclusive. Again, this is not an opinion. Hyperbitcoinization means, at the very least, a severe dampening of this climate.

Adoption of Bitcoin in any capacity is not immediately in the best interest of most nations. Not since George Washington has such a powerful leader or entity readily given up power. No one should expect any large nation to go quietly. Hyperbitcoinization will not roll down to us from the hill of good fortune. We have to hike up ourselves and claim it. And it will be a long and steep one. No country will step out of a game where they made the rules – and can always adjust them to their benefit – and enter into another game with steel walls guarded by those who used to be their subjects. They must be pushed in.

Critical mass is, at least in part, one of the issues. This is why El Salvador’s actionsare such a watershed moment. Many people correctly theorized that it would be a smaller country, under some economic control of a larger one, to adopt Bitcoin. With much diligence and good faith effort, they will hopefully flourish, and their neighbors will be encouraged to do the same. And large nations know there is strength in numbers. It cannot be overstated that this upsets the way of doing things In the modern world, and that other actors will try to thwart it.

You cannot reasonably expect a dishonest and malicious player to suddenly become cooperative.

Interacting with Bitcoin while outside of it is, in this writer’s humble opinion, the most problematic of these three games. The first two games now have considerable momentum behind them. The censorship or extreme regulation of Bitcoin seems to be the lowest cost way to resist it. What form that would take is less than obvious, but the options are limited. You can (attempt to) restrict ownership, purchasing, trading (which is to say, transmitting/routing transactions), or mining. Now, that’s “only” four avenues, but they are each as wide as the FBI’s pocketbook is deep.

Bitcoin, like the Constitution or the Bill of Rights, is not self-enforcing. It requires protecting. And the only thing to do is make Bitcoin more antifragile. Fungibility and censorship resistance will carry the team to hyperbitcoinization.

All of this is to say that the road is not even paved yet, and we shouldn’t be quick to assume the going will be easy. But at least we know where we’re headed.

This is a guest post by Nameless. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.