Understanding Cryptocurrency Game Theory

• Cryptocurrencies are a free pass to introduce any game theory the creators would like.
• In the past few years, token holders have been able to vote on rules that define a cryptocurrency’s economy by voting using tokens through decentralized autonomous organizations, or DAOs.
• For instance, Olympus DAO operated a huge decentralized money-market fund, where those who wanted to create a reliable reserve currency benefited from additional funds joining the pool.
• According to the project’s game theory model (popularized by the meme (3,3)), the most rational choice was to stake OHM into the auto-compounding protocol.
• The tokenomics of the protocol permitted this; by staking OHM, you would strengthen the decentralized reserve currency and allow people to buy more bonds.
• On the other hand, if everyone sold OHM, that would hurt the price of the protocol, and all holders would get hit.
• So, you can see how the protocol’s tokenomics incentivized people to buy and stake the token.
• Tokenomics don’t always go to plan. Eventually, lots of people did sell OHM after investors using an OHM liquidity pool on a third-party platform were liquidated.
• That caused the price to fall dramatically, scaring other investors away from the token.
• Meanwhile, the tokenomics of Hofmann’s game revolved around scarcity; there were only 10,000-character sheets that were hyped up on Twitter, which became immensely valuable.

Explore the intersection of cryptocurrency and game theory through real-world examples and tokenomics principles. Discover how decentralized autonomous organizations (DAOs) and token economics influence the behavior of holders and impact the value of cryptocurrencies.