The Prisoner’s Dilemma
The Prisoner’s Dilemma is a game which proves why two rational individuals acting in their own self interest may not cooperate to achieve an optimal outcome. This theoretical game is played as follows: Two friends are arrested for a crime. They are held in solitary cells without means of communicating with one another. The prosecutor’s do not have enough evidence to imprison both people on the principal charge, but they can both be imprisoned for lesser charges. Each person is offered the same bargain, in their own cell, at the same time. They are each given the option to cooperate with one another by remaining silent, or to betray, and testify that the other person committed the crime.
In this game there are four possible outcomes*:
1) A and B both betray each other, and each of them serves two years in prison.
2) A betrays B, but B remains silent. A is freed, while B serves three years in prison.
3) A remains silent, but B betrays A. A serves three years in prison, while B is freed.
4) A and B both remain silent. Both of them will serve only one year in prison for the lesser charge.
* It is implied that the decision to betray or remain silent will not affect a player’s reputation or well being in the future. Imagine there are no repercussions outside of the possible prison sentences. The strategy to this game changes when players play multiple times in a row, but that is a topic for another essay.
Below is the payoff Matrix for Prisoner’s Dilemma.
Payoff Matrix for The Prisoner’s Dilemma
Description of the Payoff Matrix
We can see from this payoff matrix that to achieve the optimal outcome one player must betray the other. That means that two purely rational players will betray each other. Though there is a slight advantage in both players remaining silent (a shorter prison sentence), the risk of your partner defecting is very high. The Prisoner’s Dilemma is a non-cooperative game, as the players have no information about the other player’s respective choice, so there is no means of agreement, but even if they could agree, there is no external enforcement agent binding players to their agreement. The Prisoner’s Dilemma is a game of complete information in that each knows the payoffs and strategies available to the other, but also one of imperfect information, because, at the decisive moment, one does not know whether their co-player has kept silent or betrayed.
The Bitcoin Dilemma
How does this apply to Bitcoin? A similar model can be found on any scale in our Bitcoin game. If you take any two individuals, businesses, competing nations, large corporations, any entities for whom the goal is to acquire more capital and enrich themselves, they are all witting or unwitting participants in the Bitcoin Dilemma. Players can either choose to accumulate Bitcoin at any moment or defer to a higher price.
Payoff Matrix for The Bitcoin Dilemma
On September 7th, El Salvador became the first country to make Bitcoin legal tender. The world is watching this experiment, and Bitcoiners are eager to see what country will be next to adopt Bitcoin as nations are forced to compete through accumulating or be left behind.
In September, Edward Snowden took to Twitter to urge nations to embrace Bitcoin. After El Salvador made Bitcoin legal tender, the game-theoretic prisoner’s dilemma of nation’s Bitcoin adoption started playing out in global geopolitics. The famous whistleblower highlighted that Bitcoin favors those entities (at any level) that adopt it early, thereby putting pressure on other parties, which will be penalized for being laggards.
Adoption works like this on an individual level too, any insular community ignorant of Bitcoin can live some time without noticing the effects of not owning Bitcoin, although as soon as one member of the community begins to own the hardest money known to us, and that stack begins to appreciate, those who notice their success are presented at every moment with a choice to buy Bitcoin now or put off buying Bitcoin, only to buy it later at a higher price.