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Game Theory & Crypto

Game Theory & Crypto

Cryptocurrency & Blockchain

Markets are fascinating, in particular the game theory aspect of it.

Take crypto. People always want to bet on the fastest horse. You move from stocks to crypto because historically it has done well and offers more upside. Your friend made +10% on BTC last week, while you made +10% on the S&P in a year.  

You disregard that this is just one realisation while the story could have been totally different. In order to not miss out, you buy BTC. So you sit in BTC, but then you hear ETH is more flexible than BTC and has more upside still, so you move part of your BTC to ETH. Then, you hear Solana is doing well and everyone is excited about its speed and finality. So you move some exposure to it seeking more yield. If you extrapolate far enough, then you can clearly see how a memecoin of a memecoin can be worth 100s of millions without even a promise that it will generate value to users at some point.

The net result of it is mercenary capital.
Turkish mercenary in Byzantine service c. 1436

Moreover, narratives that sell you a suite of products from 5 years into the future yet have 0 in the current moment. So the whole system settles in a lose-lose situation for the project and investor.

With the reflexivity of crypto being to the point that you can be making millions in revenue weeks after launch, efficient markets identify these misallocations of value creation vs reward, an influx of copycats are then born, and the industry suffers. In the end, you get to the realm of value extracting projects which absorb assets and then collapse under their own weight.

However, given all of that, it is still the case that innovation and technological transformation is moving forward irrespective of what happens in the market, macro, or politics. Builders will build. And the value they inflict on the world offsets all of the negative externalities arising from the laboratory experiments.

Written by Nikita Fadeev

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Game Theory & Crypto

Cryptocurrency & Blockchain