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What is Game Theory

Game Theory is a study of strategies that could lead to multiple different outcomes depending on the decision made by the competing players. The focus of the game theory is the game itself, which serves as a model of a situation for the players who participated in the game.

The Model

A game model usually consists of the following components:

Players

They make choices based on information they hold about themselves, the other players and the structure of the game.

Strategy

The full set of choices a player makes in a game.

Payoffs

A payoff is the reward to each player, dependent on the outcome of the interaction. We decide payoffs by considering each player's preferences within the game.

Payoff Matrix

A table that lists all the available strategies and their respective payoffs.
By analyzing the game model, a game theory could allow players to determine the most desirable strategy which results in the best outcome for every player involved. In LiDAO, to achieve the most desirable outcome where every player stands to get the most gain, players need to cooperate with each other. Currently, there are 3 actions a player can take:
  • Staking (+2)
  • Bonding (+1)
  • Selling (-2)
Staking and bonding are considered beneficial to LiDAO, while selling is considered detrimental. Staking and selling will also cause a price move, while bonding does not (we consider buying LiDAO from the market as a pre-requisite of staking, thus causing a price movement). If both actions are beneficial, the actor who moves price also gets half of the benefit (+1). If both actions are contradictory, the bad actor who moves price gets half of the benefit (+1), while the good actor who moves price gets half of the downside (-1). If both actions are detrimental, which implies both actors are selling, they both get half of the downside (-1). Thus, given two actors, all scenarios of what they could do and the effect on the protocol are shown here:

Situation:

  1. 1.
    If we both stake (3, 3), it is the best thing for both of us and to LiDAO (3 + 3 = 6).
  2. 2.
    If one of us stakes and the other one bonds, it is also great because staking takes LiDAO token off the market and put it into LiDAO , while bonding provides liquidity and BUSD for the treasury (3 + 1 = 4).
  3. 3.
    When one of us sells, it diminishes the effort of the other one who stakes or bonds (1 - 1 = 0).
  4. 4.
    When we both sell, it creates the worst outcome for both of us and to LiDAO (-3 - 3 = -6).
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What is Game Theory
The Model
Situation: