“If you had a good trading bot, you would just hold onto it yourself and wouldn’t share it with anyone.”
When Funguana recently, showed the progress of our system to the citizens of Reddit we received mixed responses. It was the most controversial post on the /r/cryptocurrency subreddit for a total of 12 hours, receiving 25 comments, a massive number of views, a nearly equal number of upvotes and downvotes. Overall, we call that successful. Polarizing is better than no response, as we had a better chance to learn from the people against our product.
Some people loved the idea and said they’d want to use our automated trading platform, some hated our idea and said we should give up and HODL instead. These two types of remarks, both positive and negative, are sentimental at best. However, we also saw the remark at the top of the article. Yes, while it may seemingly make 0 sense to release an evolving bot to the public, if we were to use 100% logic it makes absolute sense. This article is going to use game theory to prove that opening our platform is not just a decent move, it’s a phenomenal move for both the company Funguana and the entire industry as a whole.
Game Theory – The foundation behind the idea
A while ago, I remember reading an article from Vitalik Buterin about superrationality. Before discussing his crazy argument of superrationality, which is valid in the right environment, I must first explain the concept which it’s built upon, Nash Equilibrium. For Nash Equilibrium Wikipedia states: (in economics and game theory) A stable state of a system involving the interaction of different participants, in which no participant can gain by a unilateral change of strategy if the strategies of the others remain unchanged. This idea is hard to process until we look at how it works in real-life. For that, we’ll look into the prisoner’s dilemma. The example runs like this:
- Two criminals do what they do best and rob a bank.
- They succeed and run from the scene. People at the scene don’t know what their face looks like and they’re gone before the cops arrive.
- The local authorities find the two suspects and place them into separate rooms to be interrogated.
- The authorities say to each one of the criminals: “We have evidence that you committed a crime. If you say nothing about your partner, but we find more about you, you’re going to get a 5 year sentence. If you admit your crime and rat out your partner, you’ll get your sentence reduced to 2 years.” If both admit and snitch they get 3 years (not mentioned)
- The officers leave the room and come back for their perspectives. The criminals are unable to collaborate, but have to decide to rat out their partner, and possibly reduce their sentence, or say nothing and run the risk of getting their sentence increased to maximum.
Economist have turned this situation into a logical problem. Will the criminals incriminate each other for their own benefit now they are turned against each other? To answer the question, John Nash crafted a solution to this problem, known as the Nash Equilibrium. The goal of it is to choose the default answer to that question. John used a glorified table to answer it too. It looks a lot like the table below.
|Criminal one Cooperates||Criminal one Defects|
|Criminal two Cooperates||Both criminals get a 2 year sentence||Criminal one gets 1 years sentenced, Criminal two gets 10 years|
|Criminal two Defects||Criminal two gets a 1 year sentence, Criminal one gets 10 years||Both criminals get 5 years of sentenced|
As the logic goes, if everyone involved is extremely selfish, and expect their partner will be selfish as well, they’ll snitch on their partner to get the best deal. Meaning both would defect and get the mildly bad outcome of 5 years, which still sucks. People expect that individuals will entail a very selfish mentality, which is the reasoning behind the statement at the beginning of this article. What if reality were to explain something entirely different? What if society rewarded cooperation in the right settings?
Evolutionary Decision Making
Vitalik explains that evolution is very selfish. He based the superrationality argument on selfishness and doing work that will be more benevolent than not. It’s bounded, which means decisions are only based on the limited knowledge and experiences of an individual. This means evolution happens based on a given species’ experience, not what an omnipotent observer says a species should do. However, if modern society is any good example, we’ll see that it’s far from selfish. It more bound than all else. Many creatures, like pack animals and species with societies like ants, wolves, and humans, find more benefit to cooperation. Species like I’ve just mentioned actually evolved to use it to produce more for each species within the group. In other words, they crafted something that supersedes the Nash Equilibrium. The big question is why? The answer is externalities.
Externalities – The Missing Key
What is an externality? Investopedia explains:
An externality is a positive or negative consequence of an economic activity experienced by unrelated third parties. Pollution emitted by a factory that spoils the surrounding environment and affects the health of nearby residents is an example of a negative externality. The effect of a well-educated labor force on the productivity of a company is an example of a positive externality.
In other words, externalities are what entities produce that will have a larger effect on the everything that isn’t the producer. For example, a school that produces educated students won’t always receive the direct benefit of educating them. A business or company within the space usually will. If a school doesn’t receive the benefits of educating a student well, why do they bother? It’s a question I originally reasoned with a long time ago. Seeing I’m from Detroit, a place with a relatively failing educational system I pondered upon the question sooner than people that never would face the problem. The big reason is something we call interdependence and reputation.
When society originated, and people lived in villages, the survival of the group depended greatly on people cooperating. How else would we be able to challenge larger animals like Lions, Tigers, and Bears? Without cooperation, they would dominate us, and so will much of the environment. So human beings and many other species crafted an economic methodology of increasing our chances of survival. It’s called the division of labor. It’s the concept of having groups of people specialize in various things to increase the overall output of the society at large. In villages, we had leaders, fishermen, clothing weavers, educators, and hunters. They all did what they were doing to make sure everyone could better survive. The biggest difference is that they absolutely needed each other.
When we look at game theoretical games, like generous tit-for-tat games, we’ll see that kind forgiving groups can actually supersede and become larger than ones that are pure tit-for-tat. That’s because of selfish behaviors
The Power of Interdependence
We in the modern age are above surviving from nature. Instead, we require each other’s aid to generate economic strength. This means, survival-wise, we’re more independent than any time in history. To improve our capacity and desire to aid other people in larger society let us look no further than modern capitalism. Capitalism was implemented at its current scale because we faced an interdependency problem, where people would only act out of self-interest and cause chaos while doing so. One of the greatest drivers of capitalism in early United States history was Alexander Hamilton. Alexander Hamilton was keen to the modern selfish reality. After America’s revolutionary war in the 1770s, the government owed wealthy individuals a lot of money, and those wealthy individuals revolted in America. This caused chaos between the lower, middle and upper-class members of society.
Alex paid close enough attention to what wealthy individuals were doing, he noticed that they were acting in their self-interest, and the people that protested the wealthy individuals were too. What he did was create the first Federal Reserve Banking system. To compensate the wealthy owners that America borrowed from, he implemented a government bond program and sold those bonds to the wealthy people that lent money to the war. This tied the wealthy people’s wealth to the overall health of America, which let him reason with them, and convince the lenders to work on taking active roles in America’s growth and economic well being. As the growth of America would cause them to become wealthier. Alexander Hamilton then pushed capitalism to everyone in the country. People would try to figure out how to create a stronger local system to benefit more financially. When seen in this regard, capitalism is a good thing. People cooperate to benefit themselves and improve the community at large.
To answer why educational institutions have an incentive to better educate their students, the big reason is so the students would improve the local economy, and therefore improve the quality of life locally. This could lead to an increase in wage, in better services, and happier people. Even beyond that, inside of a competitive environment, schools have a need to increase their indirect income (through research and wealthy alumni donations). In the presence of competition, the way they attract the best students (at least at the higher level), is through a reputation system. Over time, the best students create the best income, which allows the school to grow the most. This is their means of interdependence, and in sectors where companies are heavily reliant on educated individuals, schools are generally better (except places where the companies fizzled out).
Cryptocurrency’s Interdependence Problem
Cryptocurrency has a reputation problem. I’m a college student. I see professors’ eyes gloss over, even the mathematically great ones when I talk about cryptocurrencies. Truth is, I could see why they do. Many of these people have lived through a large array of bubbles if they’ve been around for the last 40-50 years. When they look at cryptocurrencies and see people exit scamming from multi-million dollar programs, uncalled for acquisitions, unnecessary currency wars, and a lot of drug dealers, I believe the common person can see nothing more than a multi-trillion dollar scam in the making.
Instead of doing good things like Satoshi Nakamoto intended, we’re creating the same problem that was created inside of the financial industry like in the 80s and early 2000s. The key problem we have is that because there are so many independent actors, and negative actions can have 0 consequence is a person just moves money arbitrarily, a lot of negative actions are very likely to happen. These are the people that book a flight to a place outside of legal jurisdictions as if everything was a vacation, then exit scam by moving money anonymously, never to be found again.
If we were to look through history, we’d see that anytime a type of organization loses interdependence with the area it usually affects, it starts abusing its people. Growing up in Detroit, people weren’t well educated as they were in other parts of the nation. This is because Detroit began to heavily rely on the auto industry as a primary means of income. Education wasn’t taken as seriously as other places because Detroit citizens could just go work in the factory, where education wasn’t really prized.
The same is true in many other cases in history. The creation of the industrial revolution during the 1800s reduced our reliance on people, and owners began treating their workers like crap. We’re seeing the same happen with the latest internet age. Lots of modern companies like Uber, Google, Amazon, and Airbnb are large with high valuations. They have an effect on the world. People rely on their services. However, they don’t rely as much on the people they serve as people rely on them. Using programmers they’re able to leverage out their need for people. The same can be said for the financial industry. Because they’re too big to fail, they can act largely according to their best interest without needing to care about how other people in the world are affected. At least, not until a crisis happens, which a major one hasn’t happened yet. This is leading to the massive economic disparity that we haven’t seen since the pre-1929 economic crisis here in America.
As a defensive mechanism, we created laws and regulations to stop groups of people from abusing various parties that don’t fully relate to them. We hire strong leaders to bail us from the circumstances. We created the government to handle our fears. The big problem is, cryptocurrencies don’t have any means of interdependence, and we don’t have institutions to make sure people play nicely. This scares most potential investors away from the industry. Even beyond the massive possible gains, we can get from the industry, if the common person is unable to cut through the mess, they’re generally not going to join the space. Where does Funguana fit in?
A friend said it this way, “You want Funguana to be the good guy. I get it.” He has a military background. It’s a way of seeing exactly what I saw. Cryptocurrency has a good guy problem (jokingly not joking). Intentions aside, it really doesn’t usually give much of a reason to trust people. He’s not at ease talking about crypto to his friends. Some lost money due to improper actors like Bitconnect. DAOs are a good way to handle bad actors without human intervention. However, we run into a key barrier when using DAOs. They struggle to handle complex circumstances. Right now they’re very capable of handling simple problems like keeping track of gold or stabilizing dollars, but managing massive amounts of computations and automated trading is far off into the future.
Funguana wants to relieve the barrier to entering into this very corrupt landscape we the community currently have. In other words, we want to do centralized to increase centralization. This is ultimately the ultimate path to create the best positive feedback. Automated trading that we manage for a small fee is the way we want to do it. If we analyze the landscape correctly, people will be able to enter the space and join the great change out there without possibly getting scammed. As we grow, we’ll progressively move more of the platform to be more decentralized to prevent rouge actions from our own company.