# Game Theory and Incentive Design behind PoWH3D Source: **Adapted from @inventor's rant in #p3d-general on 5/20** PoWH3D is a clever self-contained simulation of the cryptocurrency space as a whole. Cryptocurrency is first and foremost a technology. While cryptocurrency can be used as an investmeas well, this is based on a form of "market speculation" powered by the mathematics of Game Theory. ## Speculation and Game Theory Speculation involves **calculating risk and conducting research before entering a financial transaction**. A speculator buys or sells assets in hopes of having a bigger potential gain than the amount he risks. A speculator takes risks and knows that the more risk he assumes, in theory, the higher his potential gain. However, he also knows that he may lose more than his potential gain. You can read more on [speculation here](https://www.investopedia.com/ask/answers/042715/what-difference-between-speculation-and-gambling.asp). Any such market, is operating within the bounds of [game theory](https://www.scientificamerican.com/article/what-is-game-theory-and-w/). Game theory is the branch of mathematics concerned with the analysis of strategies for dealing with **competitive situations where the outcome of a participant's choice of action depends critically on the actions of other participants**. Game theory can be applied to almost anything: speculative markets, war, business, and even biology. ## Greater Fool Theory All speculative markets operate, in part, through what's known as the [Greater Fool Theory](https://www.investopedia.com/terms/g/greaterfooltheory.asp). The greater fool theory states that it is possible to make money by buying assets, whether or not they are overvalued at the time of purchase, by selling them for a profit to a "bigger fool" at a later date. Through the application of this theory, almost any market speculation can become an investment opportunity. This is how the US stock market operates. Or the collection of beanie babies or pokemon cards or Elvis memorabilia. From an economics model, this falls under the domain of pure capitalism and the "invisible hand of the free market". Next, let's take a look at how **this relates to P3D** and the way P3D leverages and builds upon this model. ## Design of PoWH3D Like all speculative markets, P3D can also be played in this way. it does include a capitalist element, as one can buy p3d, and hope to sell it later for a higher price. but we dont stop there. calling it a 3d currency isnt just a meme. we added 2 other "dimensions". aka hybridized its model with 2 other forms of economic incentive modeling. these other 2 forms would be socialism, and labor based economics. In summary, there are three incentivization models built into P3D: 1. **Capitalistic** - Buy low and sell high, like all speculative markets (i.e Stock Market) 2. **Socialistic** - Earn passive rewards based on your stake within the system (i.e Social Security) 3. **Labor-based Economics** - Direct incentives to market or contribute to the system (i.e Affiliate marketing) All three of these systems are oriented around a meta-framework to dynamically adjust incentives through feedback loops. In this design, as the conditions of the game change, people will naturally begin to change how they behave. Let's explore these models in more detail. ### Overview of the Three Models socialism, in p3d manifests its self in our staking model. where you earn dividends based on the amount you hold. similar real life models would be a stock that pays dividends, social security, 401k's, and other investment vehicles that pay a return based on the amount you put in. our third dimension/economic system is the labor based one. which was added to help ensure longevity and create self adjusting incentivization feedback loops. so we manifest this using a wildly popular marketing model in the real world. an affiliate system. where people can have a unique number/link, share it, and if they spend enough time doing the "work" of marketing, can hope that people will use that link. and earn a direct and instant payout. so yea, you could play this game using only greater fool theory, but you'd be greatly missing out on it, and whatever personal form of TA you standardly apply to investments, would not fully account for everything thats going on in a 3 dimensional product/game like this. the combination of these three economic models into one single product doesn't just add up to result in more interesting play. it helps protect and insulate risk. think of it as some kind of built in hedging system. ### Hedging to Mitigate Risks #### Capitalism hedging from a capitalist perspective: albeit most people are convinced that capitalism and socialism are the worst of enemies, don't let them fool you. when properly hybridized, as we've done in p3d, one can be used to leverage and hedge the other. what do i mean? well. whats the capitalist investors worst fear? buying at an All Time High, then experiencing a crash after, with no real hope of ever attaining that ATH again in a reasonable or efficient period of time. Well, in P3D, since tax is taken on buys AND sells. if you bought at ATH, and everyone sold after you, due to the dividends earned, you'd actually be able to come out on top. how? what? that doesn't make sense? well, dont forget that EVERYONE below you paid that same 10% tax. and many of them, in that scenario, would be selling at a loss. this is one of the reasons we use the term Proof of Weak Hands. their loss can hedge your "loss". because your "loss" is never really a loss till you sell. #### Dynamic Feedback Loops next up. we have self adjusting incentivization feedback loops. if your not familiar with the concept, dont feel dumb. most people aren't. its a concept that basically states: when conditions change, people change how they behave. the way that plays out in P3D, is a few ways. first, lets use the dreaded "buy at ATH then crash" example from above. well, in a 1 dimensional currency, your stuck holding bags. feeling a fool. with no real recourse. here with P3D, by adding in a labor based option. you can actually convert from a capitalist to a labor party member, and go out there and engage in marketing. in a one dimensional currency, sure you can do this. but theres a few differences. in a 1 dimensional currency, you can only "undo your losses" if you can convince enough people to buy in to get back to your ATH. your also not paid for that marketing. your doing work. for no pay.... here its not necessary to re-attain ATH. at all. price can still keep falling. but since your paid each time someone uses your masternode/affiliate link. you can make that "lost investment" back. this is a nice insulating option to have, and one that we are the only crypto currency to employ. and if this sounds unbelievable, just stick around or ask around in here, although rare, theres been a few people that put in like $5 or $25 worth. (whatever needed to get a masternode) and within hours got lucky hand had someone do a large (10eth +) buy in using their node. instantly making 100 fold return. a much more common scenario, is the slow trickle of small masternode use, adding up to A LOT of eth. most experienced P3D players understand that the biggest winners here, are the people who market. #### Socialism another way our "self adjusting inventive bla bla bla" plays out, is for socialists. theres A LOT of people who just wanna toss in some ETH, sit back, and collect divs. but not just collect them. to actually LIVE OFF of them. in the real world this concept is commonly referred to as socialism, or UBI, or whatever. its also a system that generally speaking, doesnt work. so we modified and changed the concept of UBI/socialism here. to be not just VOLUME based. but also INVESTMENT SHARE based. think of it like this. say your 18, entering the work force. and your fortunate enough to afford to start putting away 10% or 20% of what you earn into a 401k or some REIT or something. as you build up more, you earn more dividends off that right? well here, thats true too. since your dividend earnings are INVESTMENT SHARE based. but their also VOLUME based. which means if the "economy" of p3d is stagnant, it doesnt matter your volume. your not going to make shit. which creates an incentive to get out there and make volume. how? any way you can think of. join the labor party and market. build a dapp that ties into p3d ecosphere. convince people to buy or sell. (although convincing people to sell, in mid/long term is a REALLY REALLY REALLY REALLY stupid idea, short term however, it does make some volume). so these different systems are just some ways that our unique 3 dimensional currency we've created, is not just way different that anything you've experienced. but also helps protect you, lower your risk, provide you leverage options, and helps you hedge your "bets".