Game Theory and Cryptocurrency Consensus: Exploring Incentives and Potential Attacks

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Over the years, we have been hearing about Game Theory as a fundamental role of the strategic way people interact most especially among the participants. They go a long way to play in the cryptocurrency consensus mechanisms. Most of the time, Blockchain networks actually work much more when they depend on the Decentralised system functionality because in a Decentralised system, it helps to make sure that the network security and reliability is well achieved.

But of course, those systems are quite still prone to the strategic attacks most especially if the incentives are misaligned. Today I will be talking about the massive role that game theory plays most especially in the cryptocurrency consensus mechanisms as it helps structures to sustain stability and helps to prevent any attack that might want to affect the system.

There are some incentives structures in consensus mechanisms that make it to work. The first thing I will definitely like to talk about is Proof Of Work. This PoW system works for the miners that will help to help settle a lot of difficult cryptographic puzzles as many people see it. This works in a way whereby any miner that solves the puzzle at first will add block to the Blockchain and then in return receive rewards for that most of the time in the form of transactions fee or any crypto token.

The second structure is through something called the Positive Incentive. I have actually come to discover that rewards go a long way to motivate miners and this will help to invest in lot of the computational resource's needed. Most of the time, the high cost of mining always is a very big issue also.

The third structure I will like to talk about is the Proof Of Stake which is always called the PoS. In this aspect, validators received rewards depending on the amount of cryptocurrency that is staked actually. Of course there are a whole lot of positive incentives that is involved in that. One of the strong positive incentives is the fact that validators can earn rewards back based on their participation. There is something called the slashing mechanisms to deal with the dishonest validators also.

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The last structure I will like to talk about is through the delegated proof of stake which is also called the DPoS. Most of the time, this particular structure is not common but they work actually. Their incentive for representatives works in a way whereby people who are representatives can earn rewards to help maintain the network much more. But in this case, it is the stakeholders that will vote for their representative. The perfect example of the Blockchain system that makes use of it is the Tron Blockchain.

Of course there are Game Theoretic Attacks mostly done on the consensus mechanisms that most of the time we ourselves are not even aware of. The first is that there is always 51% attacks on PoW and PoS most of the time and that is done when the attacker gained massive control of the network Computational power. This can lead to the attacker to exclude transactions or better still even rewrite the Blockchain most of the time.

There is also the bribery attacks as it is always called. PoW and PoS actually works in a way whereby the attacker will bribe the miners so that they can gang up against the network interest. This can lead to the miners carrying out fraudulent transactions and that is because they have already be bribed by the attacker. Most of the time, when this attack happens, it happens on both the PoW and the PoS and it makes the network integrity to be more compromised.

There is actually a way we can balance the incentives and security together by taking some certain measures I believe. The first is I will suggest we should have something called the dynamic rewards. I believe if rewards can be adjusted that it works based on the condition of the network, it can actually go a long way to discourage a lot of attacks and not only that but also enhance participation much more.

Also I believe we can create something called the penalty systems whereby any stakeholders or validators that is found to be carrying out any dishonest act will be punished and they can do so either by reducing their rewards massively. Also I believe we can encourage more of community involvement. When we can create a system that can encourage a lot of active participation most especially in the governance, it can go a long way to make sure that every decision carried out is for the network collective interests.

As I conclude, I strongly believe the future of the game theory is very bright as we are just starting. Even though we might not be seeing it now but it is just a matter of time. Even though there are some challenges threating the sustainability of the game theory, it is just a matter of time before it is been maintained. I believe constant innovation will settle it at the end of the day.