Game theory meets DeFi: Bouncing ideas around tokenomic design

Jack Lu, 23, was struck by the idea for his new DeFi platform Bounce while working on his thesis on game theory and cryptocurrency at Reed College in California.

Unlike in the real world, game theory actually works better when applied to blockchain and smart contracts, because the rules are fixed, the blockchain is transparent and the information can be made available to all the players.

I always say it's a successful experiment in game theory since we use smart contracts to avoid a lot of human elements for a game, and we can see how pool creators and participants act.

Game theory gets fantastically complicated very quickly with games within games, and various amounts of knowledge and information about what other players are up to, expressed using algebraic formulas.

Lu enjoys watching the auctions on Bounce to observe how things play out in the context of game theory.

"I think all types of auctions are game theory events," he says pointing out that a sealed bid auction is reminiscent of the Prisoner's Dilemma.

If you think that way others will also think that way, so this is the pattern of a consecutive game in game theory.

"It's impossible to create a perfect game at the beginning because every single game you cannot reach equilibrium immediately," he explains - which in this case means an optimal outcome.

For game theory you move to your equilibrium gradually and that's how I designed the Bounce tokenomics.

Which takes advantage of a game theory concept called a Schelling Point to reward jurors with tokens for voting for the judgement they think most other jurors are likely to give and punish them for voting any other way.