{"id":6364,"date":"2020-10-15T14:45:24","date_gmt":"2020-10-15T18:45:24","guid":{"rendered":"https:\/\/cointelegraph.com\/magazine\/?p=6364"},"modified":"2020-10-15T14:45:24","modified_gmt":"2020-10-15T18:45:24","slug":"game-theory-meets-defi-bouncing-ideas-around-tokenomic-design","status":"publish","type":"post","link":"https:\/\/cointelegraph.com\/magazine\/2020\/10\/15\/game-theory-meets-defi-bouncing-ideas-around-tokenomic-design","title":{"rendered":"Game theory meets DeFi: Bouncing ideas around tokenomic design"},"content":{"rendered":"

Jack Lu, 23, was struck by the idea for his new DeFi platform Bounce<\/strong> while working on his thesis on game theory and cryptocurrency at Reed College in California.<\/span><\/p>\n

“It took me quite a long time to think of it,” Lu explains about his game theory influenced auction platform. \u201cEveryone was talking about lending and borrowing, and doing Uniswap and providing liquidity. When I looked at this financial channel I think there’s one missing piece, which is auctions.”<\/span><\/p>\n

Lu \u2014 who counts Andre Cronje from Yearn.Finance, Kain Warwick from Synthetix and Calvin Liu from Compound as peers \u2014 describes <\/span>Bounce<\/span><\/a> as a decentralized version of eBay, Sotheby’s or Christies. Users can set up pools to auction off tokens, and play around with parameters like the number to be swapped, the time limit and different ways of accepting bids.<\/span><\/p>\n

He co-founded it with Ankr CEO Chandler Song and the bare bones, black and white platform went live on August 4.\u00a0 \u201cI partnered with some friends and we made it,\u201d Lu says. \u201cThe platform has been live for two months and it’s ranked nine on ETH gas station.”<\/span><\/p>\n

So far more than 2,700 pools have been created, and more than 500,000 Ether ($179M) has changed hands on the Ethereum version of the platform. Bounce was also one of the first five projects announced for the interoperable Binance Smart Chain \u2014 which is essentially an Ethereum clone with lower gas fees and avoid congestion \u2014 and 700,000 BNB ($18.5M)has been swapped on that version since early September too.\u00a0<\/span><\/p>\n

The site launched with two types of auctions. Fixed swap, where everyone has the same price (like an ICO from 2017) and sealed bid auctions. <\/span>
\n<\/span>
\n<\/span>“You can put in a floor price and a timer and anyone can come and bid above the floor price. And when the pool closes, the smart contract will fill the orders from the highest price down to the bottom. So people do get different prices.”<\/span><\/p>\n

Lu recently added in some variations on Dutch style auctions \u2014 which start from a high price and sell off the tokens gradually as the price comes down \u2014 as well as English auctions, which start from a reserve price and head up.<\/span><\/p>\n

World tour before San Francisco<\/span><\/h4>\n

Originally from Guangdong Province in China, Lu attended high school in Britain where he took intro courses for college economics that enabled him to finish his degree at<\/span> Reed College<\/span><\/a> early. \u201cThat was where Steve Jobs went,\u201d says Lu. It was there he discovered crypto in 2016.<\/span><\/p>\n

“Quite a lot of teenagers got into crypto at the time and my college roommate taught me about Ethereum and then I started to read medium articles and Reddit,” he says. Lu began joining crypto groups and became friendly with NEO founder Hongfei Da which led to a six month internship with <\/span>NGC Ventures<\/span><\/a> in Shanghai in 2018.<\/span><\/p>\n

It turned into a full-time gig after he graduated in 2019 and he’s now the US Investment Manager for the fund, based in San Francisco.<\/span><\/p>\n

“I help our portfolio projects to design their tokenomics,” he says. “During my due diligence on many projects, I have a broader view on what’s going on in the crypto market and what the progress is on tokenomics in the crypto world.”<\/span><\/p>\n

Learning to play games<\/span><\/h4>\n

He may be the youngest employee at the firm, but he’s also the only one to have written his thesis on blockchain and game theory \u2014 one of just a handful on the subject in the world at the time.<\/span><\/p>\n

Game theory<\/span><\/a> is a branch of mathematics that examines the strategies employed in competitive situations where the outcomes for players depend critically on the actions of the other players. It has been applied to everything from war, to business and biology, but Lu’s thesis explores why it\u2019s a perfect fit for cryptocurrencies. The ‘players’ in the decentralized world of blockchain, from miners to traders and hackers, are independent and make decisions after evaluating the benefits and costs associated with their moves.\u00a0<\/span><\/p>\n

Unlike in the real world (as the<\/span> New Yorker points out<\/span><\/a>), 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. Research has shown that the more informed party in a deal typically captures up to 18% more economic benefits than the less informed party. Lu explains:<\/span><\/p>\n

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.<\/span><\/p><\/blockquote>\n

His thesis examined concepts like the<\/span> Nash Equilibrium<\/span><\/a>, which is used to analyze the outcome of games where there is a strategic interaction between several decision makers and where the outcome for each depends on the decisions others make, as well as their own.<\/span><\/p>\n

Snitches get four years<\/span><\/h4>\n

The famous example of the<\/span> Prisoner\u2019s Dilemma<\/span><\/a> helps illustrate the concept:<\/span><\/p>\n

Two suspects are interrogated separately for a crime. If both confess, they get four years in jail. If neither does, each will be sentenced to two years in jail. If only one confesses he will be released and the other sentenced to six years.<\/span><\/p>\n

The best outcome is that neither of them confess. However, the model predicts both will confess, because they don\u2019t have any information about what the other prisoner is doing and thus hedge their bets and both converge at the middle outcome.<\/span><\/p>\n

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