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26 October 2020

Game theory meets DeFi: Bouncing ideas around tokenomic design

Game theory meets DeFi: Bouncing ideas around tokenomic design

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“It took me quite a long time to think of it,” Lu explains about his game theory influenced auction platform.

When I looked at this financial channel I think there’s one missing piece, which is auctions.”.

Lu recently added in some variations on Dutch style auctions — which start from a high price and sell off the tokens gradually as the price comes down — as well as English auctions, which start from a reserve price and head up.

Lu enjoys watching the auctions on Bounce to observe how things play out in the context of game theory.

“I think all types of auctions are game theory events,” he says pointing out that a sealed bid auction is reminiscent of the Prisoner’s Dilemma.

“If you raise (the price), everyone needs to pay more than the sealed bid creator’s floor price.

But if everyone bids near the floor price, everyone would be better off.

So I think this kind of on-chain behavior is quite interesting to see.”.

Lu says that auctions provide a better route towards price discovery for Initial DEX offerings than exchanges, or automated market makers like Uniswap.

He compares it to a guessing game, where players in the second round assume that because there’s more supply after the first round, they can enter at a lower price, but in the third round they assume everyone else will bid lower again, so en masse they bid higher in order to ensure they get tokens.

Users with large piles of tokens can set up a pool, either privately or publicly, to arrange an OTC deal and avoid the price slippage that would occur on a centralized exchange.Around 50 IDOs and OTC trades have already made use of the platform.

“I think an English auction is a perfect solution for NFTs that are art or tools in a game.

But there are more functionalities, like using NFTs as collateral or NFTs as a loan, so for that dutch and sealed bid auctions have some special use cases.”.

“It’s impossible to create a perfect game at the beginning because every single game you cannot reach equilibrium immediately,” he explains — which in this case means an optimal outcome.

“A lot of projects think they can which is why they build a very, very complex token economy.” He explains that:.

This is an issue that plagues DeFi protocols with a host of scam tokens listed on Uniswap every week.

Interestingly enough, it’s not based on the similar soundingKleros curated token registry for Uniswap, which takes advantage of a game theory concept called a Schelling Point to reward jurors with tokens for voting for the judgement they think most other jurors are likely to give and punish them for voting any other way.“Right now there’s not a mechanism, but later there will be punishments, Lu says of the social trust system

But this is not all that governance is about, there should be a large, large social element and people should be able to use tokens to do some interesting stuff

Lu says he’s just happy if “there are more people starting to think of different types of auctions and start to start to see this is also a DeFi piece that people can work on” and isn’t worried about clones

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