# Game Theory

Interaction between participants in the blockchain ecosystem and their incentives to behave honestly

Last updated

Interaction between participants in the blockchain ecosystem and their incentives to behave honestly

Last updated

What is Game Theory?

Game theory is the study of mathematical models of strategic interactions among rational agents. It has applications in many fields of social science, used extensively in economics as well as in logic, systems science and computer science. Traditional game theory addressed two-person zero-sum games, in which a participant's gains or losses are exactly balanced by the losses and gains of the other participant. In the 21st century, game theory applies to a wider range of behavioral relations, and it is now an umbrella term for the science of rational decision making in humans, animals, as well as computers.

How to solve the problem?

Consensus:

Mechanism to ensure that all parties agree that a certain state of the system is correct

The Truth (verifiable)

Consensus mechanisms are based on game theory

A Byzantine fault (also Byzantine generals problem, interactive consistency, source congruency, error avalanche, Byzantine agreement problem, and Byzantine failure) is a condition of a computer system, particularly distributed computing systems, where components may fail and there is imperfect information on whether a component has failed. The term takes its name from an allegory, the "Byzantine generals problem", developed to describe a situation in which, to avoid catastrophic failure of the system, the system's actors must agree on a concerted strategy, but some of these actors are unreliable.

Properties of Proof of Work (PoW)

Proof of Work is the consensus algorithm intended to provide incentives for responsible behavior for blockchain transactions.

Concept by Cynthia Dwork and Moni Naor in 1992 in the paper "Pricing Via Processing, Or, Combatting Junk Mail, Advances in Cryptology"

Named by Markus Jakobsson and Ari Juels in 1999 in the paper: "Proofs of Work and Bread Pudding Protocols"

Mining

PoW ensures that participants in the network agree on the state of the ledger (i.e. the order and validity of the transactions) through a process that involves solving complex cryptographic puzzles

"Miners" do mathematical calculations on their computers to verify that the transactions are valid.

Mining comes from trial and error of finding a Nonce (random number) that satisfies the degree of difficulty of the network

Difficulty ensures that the process of adding new blocks to the blockchain requires a significant amount of computational work. This makes it economically infeasible for malicious actors to manipulate the blockchain

Asymmetry

Requires a significant amount of computational effort to solve a puzzle or perform a certain task

Verifying that the work has been done in a relatively simple and quick manner.

Properties of Proof of Stake (PoS)

Proof of Stake provides an alternative to PoW in the application of consensus algorithms and the security of the blockchain.

Known as proof of participation

To participate in the validation, the amount of coins that the validator has is used, instead of the computational power

The validator must place his deposited coins in a kind of safe to "prove" his participation, without moving the coins

The more coins you have, the greater the chance of validating transactions and earning from them

In terms of energy, it is more economical than PoW

It should bring more security and decentralization, but it makes larger coin holders more likely to get more coins.

Properties of Proof of Authority (PoA)

Proof of Authority provides another alternative to PoW/PoS systems. It is a consensus algorithm suitable for private and permissioned blockchain which relies on a number of pre-chosen authoritative nodes called the validators. (Singh et al., 2020a)

Used in permissioned Blockchains

Group of AUTHORITIES. These Authorities are the Validators check whether new transactions align with the network’s rules and ensure that the sender has adequate funds to complete the transaction

Specific Nodes are defined and authorized to create new blocks in a chain. It needs approval from most of the nodes for the block to be created

Used in private Ethereum networks and others