One of the most significant innovations in human behavior in the past 20 years has been the search engine Google while blockchain technology has the potential to have similar impact in the next 20 years. There is a defining similarity between the two technological advances as both have decentralized participants create value out of being the most relevant member of an ecosystem. Game theory runs through both technologies as Schelling points, coordination and punishment have been built into the strategy necessary for a participant to maximize their payoff as measured by money and duration of play.
A researcher looking for the best academic reference paper on a subject and a seller of rare art looking to transact with a party unknown to them with no time or ability to research the other party are both looking for a Schelling point. Google and cryptocurrency provide it utilizing the same game theory protocol.
Coordination and Schelling Points
The corporation known as Alphabet and its search engine Google engage in a coordination game with the user. A meaningful outcome is defined as the specific needs of the user are met within constraints of time, specificity and usefulness. The Google search engine is listing the Schelling point in a coordination game followed by listings that are not the best answer in the game but possible answers. In the coordination game neither party can communicate with the other but must choose a common answer like where to meet in New York City. A Schelling point may be Grand Central Station, but another weaker answer may be the Empire State Building. Google’s search engine lists the best answer and then the others. In game theory, the Schelling point always has the highest payoff.
When two parties utilize an asset as an agreed upon medium of exchange to facilitate trade, the constraints are time, specificity and usefulness. Neither party wants to have to do due diligence on the value of the asset therefore predetermined characteristics must be present. The two parties do not want to spend their time coordinating on the specifics of the asset and certainly want it to be useful after the transaction thus the best answer is then Schelling point which eliminates the existing prisoners’ dilemma. In some cases, there could be possible answers that are not defined as optimal such as other currencies or gold but there is one solution with the highest payoff.
Cryptocurrency has been brought to market to facilitate transactions utilizing the coordination game with another constraint removed. Paper currencies have a central bank with the authority to decide upon the best asset to transact trades in their sovereignty while the Schelling point in cryptocurrency is defined by the blockchain because itself because it is relevant and special to the marketplace. (When a miner tries to cheat and splinter off the blockchain, the new chain is not a Schelling point and is thus worth less).
Google and cryptocurrency are built utilizing Reverse Game theory through mechanism design. In a game where there are players not willing to reveal private information to the principal, mechanism design starts at the end of the game and goes backward to solve for the solution. Cryptocurrency utilizes the design to enable two parties unknown each other the confidence that a transaction does not need an intermediary to be defined as relevant while Google provides the most relevant answer. Both are the maximum payoff for the rational player.
For a participant to maximize value in the Google ecosystem an extremely high PageRank is necessary. The top choice gets 33% of all clicks from the public while the second and third get 15% and 9% respectively. Thus, despite a long list of answers, the maximum payoff for the participant is to be the Schelling Point or a very near substitute. Google institutes punishment for participants trying to break the rules and create a false relevancy. The algorithm has numerous tests and traps to maintain the true Schelling point. Similarly, cryptocurrency miners are punished for cheating by having no other participants finish their chain and thus make it less valuable. Neither system is rational and credible without the ability to punish.
The Continuum of Information to Currency
Game theory is not relegated to thought experiments for mathematicians and psychologists. It is redefining many aspects of our lives from information to begin the purchase to currency to complete the transaction. Currency was once the domain of central banks, but it is now becoming decentralized. Expert analysis and opinions were once decentralized and disparate but are now available in a curated ranking by Google resulting in a game of winner take most. Schelling points have made information into currency while currency is derived from information.
There is the old saw that “information is power”. Now that we have information as a currency itself and not an intermediary to acquiring currency, are we underestimating its disruption?