Types of Game Theory in DeFi Protocols
Original Author: Jesus Rodriguez
Original: Game Theory in DeFi Protocols Part I: Types of Game
Symmetry, information integrity, and cooperation models are some game models commonly found in DeFi protocols.
Game theory is an intrinsic part of the crypto ecosystem and is especially important in DeFi. From incentive models to governance voting dynamics, game theory is at the heart of many DeFi protocol designs. However, there has been little coverage of game theory in the DeFi community. So we dedicated an article to introduce some basic ideas behind game theory.
The history of game theory is attached to the history of computer science. Much of current game theory research can be traced back to the work of computer science pioneers Alan Turing or John von Neumann. The famous Nash Equilibrium popularized by the movie A Beautiful Mind is the cornerstone of many gamified interactions in modern systems. However, modeling DeFi protocols using game theory principles goes beyond Nash equilibrium. The benefit of understanding what it means to build a DeFi protocol using game theory principles is the ability to understand the different types of games we typically encounter in social or economic interactions.
DeFi protocols are ideal candidates for applying the principles of game theory because they involve the interaction of many participants.
Player design: Game theory can be used to optimize the decisions of players for maximum benefit
Mechanism design: Inverse game theory focuses on designing a game for a group of intelligent players. Auctions are a classic example of mechanism design.
5 Games Related to DeFi Protocols
Since its inception in the 1940s, game theory has focused on modeling the most common interaction patterns we now see in multi-agent AI systems every day. Understanding the dynamics of different types of games in an environment is a key element in designing the dynamics of a DeFi protocol. I like to use a five-factor criterion to understand the game dynamics in DeFi protocols:
Symmetrical and asymmetrical
One of the easiest classifications of games is based on their symmetry. A symmetric game describes an environment in which every player has the same goal and the outcome will depend only on the strategies involved. Chess is a classic example of a symmetric game. Many situations we encounter in the real world lack the mathematical elegance of symmetry because the players often have different or even conflicting goals. A business negotiation is an example of an asymmetric game in which each party has different goals and evaluates the outcome from a different perspective (eg: winning a contract versus minimizing an investment).
Perfect and Imperfect Information
Another important classification of games is based on the type of information available. A perfect information game is an environment in which each player can see the actions of the other players. Chess is also an example of a game of perfect information. Many modern interactions are based on the environment in which each player's actions are hidden from the other players, and game theory classifies these scenarios as games of incomplete information. Games with imperfect information are everywhere, from card games like poker to self-driving car scenarios.
Cooperation and non-cooperation
A cooperative game environment is one in which different players can form coalitions to maximize the final outcome. Contract negotiations are often modeled as cooperative games. Non-cooperative scenarios describe environments where players are prohibited from forming alliances. War is the ultimate example of a non-cooperative game.
Synchronization and Sequence
Sequential games take place in an environment in which each player has information about the previous actions of other players. Board games are mostly sequential in nature. Simultaneous games represent scenarios in which two players can act simultaneously. Stock trading is an example of a simultaneous game.
Zero-sum and non-zero-sum
A zero-sum game is when one player's gain always translates into the other player's loss. Board games are examples of zero-sum games. Non-zero-sum games often arise in scenarios where multiple players can benefit from the actions of one player. An economic interaction in which multiple players cooperate to increase the size of a market is an example of a non-zero-sum game.
These five games are very common in the current generation of DeFi protocols.
