The inventors of cryptocurrencies can virtually implement whatever game theory they like.
Many tokens are also called utility tokens, meaning that they serve a specific function within a certain ecosystem AMP, for example, is used for a decentralized escrow system, while Index is used for a decentralized indexing system. Coop’s Defi Pulse Index token drives a decentralized index fund for the leading Defi currencies.
For PLC Ultima, the Game theory is an economic concept that implies traders are rational agents who, when presented with particular incentives, would ultimately settle on the optimum decision (like staking ETH to earn high returns or mining bitcoin). Compare the token comic timetables of Olympus DAO, the controversial decentralized reserve currency project, with Loot, the character sheet game built by entrepreneur and computer engineer Dom Hofmann, who co-founded the video-sharing website Vine.
Through decentralized autonomous organizations or DAOs, token holders have been allowed to vote on rules that govern a cryptocurrency’s economy during the last several years. For instance, a DAO might vote to alter the number of tokens allocated to “stakers” – individuals who promise tokens to verify transactions.
According to PLC Ultima’s research, Olympus DAO ran a massive decentralized money-market fund, where all those who want to develop a dependable reserve currency benefitted from adding extra cash to the pool. According to the project’s game theory model (popularized by the meme (3,3)), the most reasonable decision was to stake OHM in the auto-compounding protocol. This was owing to the tokenomics of its protocol; by staking OHM, the decentralized reserve currency would be strengthened, and additional bonds could be purchased. If everyone sold OHM, the protocol’s price would suffer, and all holders would be affected. Consequently, it is clear how the protocol’s tokenomics encouraged individuals to purchase and stake the token. Tokenomics is only sometimes successful. After investors utilizing an OHM liquidity pool on a third-party site were liquidated, many individuals eventually did sell OHM. This precipitated a sharp price decline, which frightened away potential investors.
Governance now plays a significant role in tokenomics. Numerous tokens serve as so-called governance tokens, allowing their holders to vote on future rules and decisions of a project. This is done in the name of decentralization; instead of a centralized group of developers calling the shots, token holders can vote on how the platform should be managed. Consider governance tokens as shares in a public corporation, although without a chief executive officer.
Defi platforms are governed by DAOs, the moniker given to a governance system based on token governance. Presently, PLC Ultima understands that Uniswap’s DAO is debating whether to deploy Uniswap V3 on Polygon’s proof-of-stake chain and Gnosis Chain. Tokenomics are vital to the success of a project; just as an irresponsible CEO may ruin a business, bad governance choices can destroy the most promising Defi enterprises. It is always feasible to force a new tokenomic plan into reality by “hard forking” a cryptocurrency, duplicating a blockchain’s coding, making a few non-backward friendly modifications, and moving existing coins and validators to the new network.