NFT staking creates the possibility of win-win outcomes, such as improved project sustainability (from increased community member participation) at the same time as “Price Go Up” (from decreased supply of items listed for sale). But Why? We understand the typical benefits of staking, but why can the benefits of staking NFTs result in win-win outcomes? This is an important question to answer because it’s this “Why?” that will lead us to new forms of utility not yet conceived. Can this “Why?” be explained by “Game Theory”?
Today we’ll be considering, in the framework of Game Theory, various payoffs of NFT staking. Is it possible to reach win-win solutions, or is NFT staking a zero-sum game?
NFT Staking Modeled As A Stag Hunt Game
The choice to stake or not is not coercive. Rather, it’s a choice of payoffs, and players in the game have free choice. When a community member, or player, is presented with an opportunity to stake an NFT for a utility, that player must make a choice. While these possible choices include: “Stake”, “Sell”, and “HODL”, I choose to eliminate HODL as a strategy in order to focus on those choices that most impact the individual players, the project, and the community at large – “Stake” and “Sell”. Therefore, we shall consider a simple game with only two choices – “To stake, or not to stake?” That is the question!
This game most closely resembles “The Stag Hunt”, a famous game of collaboration in Game Theory that yields two Nash Equilibria. At the heart of “The Stag Hunt” is the question of trust, and this game often used as an analogy for social cooperation, since much of the benefit that people gain in society depends upon people cooperating and implicitly trusting one another to act in a manner corresponding with cooperation. In order to achieve maximum payoff, players must coordinate and trust one another to take the agreed to strategy. However, with a risk-free and independent strategy available, coordination may fail.
In order to find the win-win solution of our 2-Player, 2-Action NFT staking game, we clarify the players, strategies, and payoffs. As mentioned, we have two players, and our strategies are “Stake” and “Sell”. But what are our payoffs?
If Player A stakes, but player B sells, we end with a zero-sum result. Player B wins at the expense of Player A. This makes sense – Player A seeks to reduce supply, a win for both himself and his community, while Player B seeks an exit from the community and quick liquidity. With inverse player payoffs from the previous example, if Player B stakes, but player A sells, we still end with a zero-sum result. Player A wins at the expense of Player B. This also makes sense – Player B seeks to support the NFT collection floor price, while Player A seeks to get whatever price he can for his assets.
The two Nash Equilibria, or solutions, in the example above are found at (Sell,Sell) and (Stake,Stake). These Nash Equilibria are highlighted below.
As in “The Stag Hunt”, free choice leaves two clear solutions for community members in answering the question, “To stake, or not to stake?” The Nash Equilibrium found at (Sell,Sell) yields a clear win for each player with a payoff of “1”. But, in cooperation, coordination, and trust, we can achieve results greater than the sum of our parts. Rather than “1” point of utility to each person, why would we not seek the win-win-win solution of staking for all and the “3” point win for each player?
In the absence of other data, we must assume the only consideration is trust. I trust you to trust me to stake, not sell. If you stake, I’ll stake, and we’ll all win – supply will be taken off marketplaces, price will go up, reputation will grow, and trust will reach out to new audiences.
NFT Staking Modeled As A Rock-Paper-Scissors Game
As always, in order to establish game parameters and confirm Nash Equilibria, we need to first clarify players, strategies, and payoffs. We’ll play this as a 2-player, 3-action game, in consideration of the three primary staking utilities (governance, passive income, and DeFi collateral), and assign linear values to payoffs in terms of preference.
2-player 3-action games are well-known in Game Theory, the most famous of which is probably “Rock-Paper-Scissors”, a zero-sum game whose payoff matrix can be illustrated as in figure below.
In our game, as in the game above, we have two players, but our possible strategies include governance, passive income, and DeFi collateral, rather than rock, paper, scissors. We are therefore not playing a zero-sum game, but rather a cooperative game in which people can communicate with one another in making choices for best outcomes. How do we assign values to payoffs? In a linear way based on preference, as mentioned by Arthur Copeland above:
- We assign 1 point of value to an option for being a utility, indicating real value.
- We assign 1 point of value to an option for being core to the 12 Principles of Civilization, indicating long-term value.
- We assign 1 point of value to the option of the three that is in the highest tier of the 12 Principles of Civilization, indicating preference.
- We assign 1 point of value to an option for each of the three requirements fulfilled in becoming a Schelling Point of attraction and focus. To reiterate from above, the three requirements of a Schelling Point are prominence, conspicuousness and uniqueness.
Now let’s assign values to each of the three possible NFT staking utilities mentioned.
- Governance utility value = 1 point of value to an option for being a utility, 1 point of value to an option for being core to the 12 Principles of Civilization, 1 point of value to the option that is in the highest tier of the 12 Principles of Civilization, 1 point of value to an option for each of the three requirements fulfilled in becoming a Schelling Point of attraction and focus (as governance is the utility Schelling Point, governance earns three points here) = “6” value
- Passive Income = 1 point of value to an option for being a utility, 1 point of value to an option for being core to the 12 Principles of Civilization = “2” value
- DeFi collateral = 1 point of value to an option for being a utility, 1 point of value to an option for being core to the 12 Principles of Civilization = “2” value
Therefore, our 2-Player, 3-Action NFT Staking Game has a payoff matrix as seen below.
It is clear in the game we’ve modeled above that multiple Nash Equilibria exist, found for example at strategies (DeFi, DeFi), (Passive Income, Passive Income), and (Governance, Governance). Can you identify all of the Nash Equilibria?
There are a total of five Nash Equilibria in the example above. Regardless of a decision made, all players win in that each decision yields a positive payoff. However, it is clear from above that the best decision for everyone, the win-win solution, is in trusting one another to stake for governance such that together, through collaboration and communication, players can better direct and control future payoffs. Working together in governance is the rational (selfish), intelligent, obvious and unique strategy.
Closing
NFT staking stands at the intersection of game theory, Web3 technology, and socio economics, and we should expect innovative utilities to spring from the long-term incentive of staking for governance, in particular. It is governance that unlocks new avenues for community engagement, self-directed rewards, and portfolio value growth, and it is staking for the benefit of the governance utility that can result in winning solutions greater than the sum of its individual parts, allowing NFT owners to remain rational while still providing for the greater good of their communities and projects.
As Game Theory has shown, it is through staking for governance we can achieve 1+1 = 3 results!
Thanks for reading!