Positive, Negative, and Zero-Sum Games
The world is a hellscape of vultures trying to separate honest people from their money. The most visible method of obvious fleecing today is cryptocurrency. Much has happened in the world of cryptocurrency between the time I started writing this and today, and it has been well documented by better writers than myself. I’m no expert in game theory and this isn’t about whatever crypto’s scam of the day is, but more a primer on the types of games – conceived broadly – that one can engage in so that we may find ourselves clear-eyed in the face of the Tulip Mania’s to come.
A positive-sum game is a type of non-zero-sum game that refers to a situation where the total of the gains and losses is greater than zero. Assume an author with a hit novel on their hands in a publishing industry less consolidated than what we face at the present moment. The author, the author’s agent, and the publisher all come to an agreement where the release of a forthcoming novel meets the needs of all parties. The author should receive an advance to write the work and royalties for the publishing of the book. The agent gets their fees and the publisher upholds their end of the agreement to ensure that the book does get printed, marketed, and sold. At the end of it all, there is more of the resource the parties were seeking—either money or a good book to read—than before they came to an arrangement.
Our publishing example, can’t work as a zero-sum game. The publishing industry isn’t one where one author’s success means another failure, and in a healthy industry all sorts of books could be published with proper remuneration for the authors. What would qualify as a zero-sum game? A zero-sum game is one that refers to a situation where the total of the gains and losses equal zero. Both chess and poker would qualify as zero-sum games. The difference between being one gives the players perfect information and the other does not.
In chess, you have perfect information because you possess all the game’s possibilities. You can view into the past for how previous turns went and the ability to extrapolate possibilities of the future based on the board’s present state. Poker, on the other hand, intentionally keeps information hidden from the players. In the realm of scams, a Ponzi scheme would fall under the zero-sum category because the scammer’s gains equal the victim’s losses. In each case, the gains and losses equal each other. There is neither deficit nor surplus, only one winner and one loser.
A negative-sum is a non-zero-sum game that refers to a situation where value is destroyed. A rather stark example of a negative sum game is war. No matter the motivations or outcomes, there will be death, collateral damage, and general destruction that would not have existed without war. Another example I have seen used is budget cuts across an organization. Every department stands to lose something from the cuts. This could create tense scenarios with politics and a general jockeying to ensure you or your department does not take the biggest loss.
On the face of it people might assume cryptocurrency falls into the realm of Ponzi schemes, but writing for the Financial Times, Robert McCauley argues that with Bitcoin we must consider that:
“there would be no long-running legal effort to chase down those who cashed in their bitcoin early in order to redistribute their profits to those left holding bitcoins. Holders of bitcoin would have no claim on those who bought early and sold.” (Financial Times 2021).
Additionally, McCauley argues, for the consideration of the social cost of cryptocurrency. The largest cost, of course, being the negative environmental impact that comes from the electricity consumption of running thousands of CPUs to solving pointless math problems.
For the reasons that cryptocurrencies can only be cashed out by selling them to the greater fool, and they cause additional social harms including greater greenhouse gas emissions, wasted electricity, e-waste, and greater hardware costs.
The Single Exception
While I hope this post is useful for thinking about all future efforts to separate people from their possessions, it is leveled at cryptocurrency. There is a single exception I would like to point out regarding its utility. The only time cryptocurrency isn’t an out-and-out scam is as a censorship-resistant payment platform of last resort. I do not know where this particular phrasing originates, but I came across it on Aviv Milner’s podcast When the Music Stops. Broken down, the phrase means that crypto can serve as a way to get money to people who may not be able to freely use regulated systems without interference. Consider the cases of activists, journalists, or sex workers under repressive regimes,
Last resort may be the most crucial part of this phrasing, though. It’s a method of last resort because it is loaded with risk. If you follow Web3IsGoingGreat, you’ll know that daily Molly White documents a seemingly endless series of rug pulls, bad ideas, and general buffoonery. The reason that cryptocurrency is the last resort is that, despite the scams, these are the people you are expected to trust to get money from your wallet, through an exchange, to another party, and back out into a usable currency.
A lot can go wrong, and if it does, you’ll have no real legal or regulatory recourse. Even so, this singular use case is what crypto is fundamentally about—skirting the law. While we can see clear exceptions, we know that people in financial spheres endeavoring to skirt the law are not doing so for your benefit.
The Hell We Live In
It is important to be able to recognize these kinds of situations because we live in difficult times. While crypto’s fallout and recent movement from the Federal Reserve may lure investors back to more certain and regulated assets, our world is increasingly unstable. People will be pushed ever further into desperation, and the next villains to take the stage are waiting in the wings. The next great fleecing may not be purely speculative digital commodities or receipts to infinitely fungible jpegs. It very well could be something that catches more people in its tendrils. It could be a scam centering food security, or access to water, a 2008 redux or any other basic necessity that shamefully goes in short supply. We can’t know the next ruinous thing, but for the safety of our friends, family, and communities we must view the approaching salesmen with more credulity.
This post spawned because of cryptocurrency, so here are some recommendations from some of the best critics in the space.
This episode of When the Music Stops is what got me wanting to write this post. I think the podcast conversation presents a more informed and detailed breakdown of the game theory, especially as it relates to cryptocurrency, and I highly recommend giving the podcast a listen.