Basic Game Theory: Why Steemit Whales Won’t Sell Past a Certain Point
Starting Thoughts on the Price Trend
Many have been noting the price drop recently and chalked it up mostly to whales cashing out. I think there is some truth to this but only because our market and order books are in their infancy. We don’t possess the massive bid and ask walls coins like bitcoin so it is easy for a single heavy seller to temporarily crash the market. In my opinion this is a large reason we have been seeing a continuous downtrend in the short term, but over time this will change. As our market becomes more robust and as we add users, more buyers and speculator will fill up order books. That being said I don’t believe we will be seeing large dumps long term and that is because of basic principles in economic game theory.
Game Theory
If you are unfamiliar with game theory, it is a way that economists try to model and analyze how people or businesses strategize and act in a competitive market situation. Game theory is not purely economics however, as it also borrows many concepts from psychology that can be used to give a better representation of what certain actors are thinking about when they make certain decisions. Game theory is also not strictly used for businesses in a competitive market, but can be used to analyze many situations from whether or not a country should go to war, to whether or not you should take a plea deal if you are facing prosecution. However game theory has many main principles it follows to justify how people act and there is one in particular I want to focus on today, which is actors in a competitive market will sacrifice possible short term gains for longer small term gains if the short term gains come with possible systematic risk.
“Shear the Sheep Don’t Skin It”
If the principle of is actors in a competitive market sacrificing possible short term gains for longer small term gains if the short term gains come with possible systematic risk, is confusing I will put it in simple terms for you to understand. Above I have a quote “Shear the sheep don’t skin it” which encompasses this principle pretty well. The idea is if you are a shepherd that owns one sheep, skinning it and butchering it and selling its byproducts may net you 50 dollars one time in the short term, but you no longer have a sheep or a business. On the other hand you could shear the sheep every two weeks and make 20 dollars each time for a period of a year until the sheep dies. What is the smarter decision? Obviously shearing the sheep and getting profit over a period of time rather than all at once is the better decision. Big actors in a market understand these principles and act accordingly because in a competitive market, making the most profitable decision is key.
If you still are having trouble I’ll give one more example that we have seen many time in history regarding kings and how they chose to tax. Everyone hates taxes but it has always come down to HOW much you hate taxes. In medieval times, tax too little and you didn’t have enough to support your kingdom, tax too much and you faced an uprising. This is the same idea as before. In the short term a king could raise the taxes to 80% but eventually the citizens will start an uprising and overthrow the king, but tax them 30% in the long term and they just complain and continue on with their daily lives. The key here is to make the most amount of money without having systematic risk which would shut the entire profit stream down.
“In levying taxes and shearing sheep it is well to stop when you get down to the skin”. - Austin Omalley
How Game Theory Relates to Whales on Steemit
Whales on Steemit are no different than the businesses and people in the examples I provided above, like all of us they seek to make the most amount of profit and dumping all at once is not how it is done. If we look at the payouts we can see that whales are cashing out some but not all of their Steem Power because in the long term, making sure the system survives and thrives is a much more profitable outcome. So when the price falls to a certain point, whales will start to cash out less or stop cashing out at all if it jeopardizes the market as a whole. Maybe of the whales who own a million dollars or more in Steem power see the greater picture that, with a more mature market their shares could be worth 10 times that. Much like mining in bitcoin (shout out to @alexgr for the comparison) it is more profitable for miners to not collude and fork the code, but rather follow the decisions of the masses because essentially they would be killing the golden goose if they did. Not just whales, but the developers and all users in general are all trying to make as much profit as they can so they will take the long term choice over the short term choice if given the two.
I think we will most likely still see a price drop in the near future just because of how fast the price rose in a few weeks, we have to correct back to a market equilibrium and then continue to move up from there. I have faith though that, with the amount of new users, posts and developments coming to the Steemit platform that we will soon begin to grow again.
-Calaber24p
You are good at whale fishing, but bad at game theory. In your analogy, the problem is that there are many shepherds shearing a sheep. It is a Tragedy of the Commons, and whales that do not cash out will end up being the bagholders.
With all due respect I disagree, this isnt a Tragedy of the Commons scenario. In a Tragedy of the Commons scenario the main reason it happens is because actors aren't incentivized against using a public good. Steemit has many incentives put specifically in place to sway people from selling and holding instead long term. The incentives put forth by steemit to obtain more profit by holding long term is the sole reason this becomes a game theory problem.
The incentives for holding long-term decrease if the price has a long-term downward trend. That said, I really don't believe many people powering down, whale or not, is a problem. The "money" produced often stays in the ecosystem. It creates trading opportunities on the internal market.
I agree with you that the incentives for holding long term decrease if the price has a long term down trend, but currently between the interest rates earned on steem power, the ability to earn large amounts from curation rewards and having the power to influence what content gets seen, the incentives far outweigh the benefits of powering down and selling all of it. This can change over time as the interest rate returns fall and inflation stays high, but im hoping by that time (roughly 9 months) we will have a much more established ecosystem. I think many people forget that many of the whales bought in at such low points that their opportunity costs to sell are extremely low as well. The market has to correct on the price, its just how it works. I said at $3 I wouldnt be surprised if the price fell back to $1 and im still holding that state of mind. The market has to get to a point of equilibrium where speculators and incoming users are comfortable with buying steem and getting involved in the system.
If it's not Tragedy of the Commons then it certainly has potential to be some form of the Prisoners Dilemma.
👍nice post, nice theory @calaber24p
Tragedy of the Commons doesn't apply only to "public" goods but to shared resources. Liquidity in the trading books is a shared resource. If you prefer, you can also see it as a prisoner dilemma: if not all the whales stop cashing out, the ones who keep doing so are the ones who keep damaging the price but get the benefit of cashing out earlier. This creates a positive incentive for being selfish.
I was just using public good as a way to say that it was open to many participants, when I think the whale situation should be more studied as more of an oligopoly. I like the prisoner dilemma approach better. However I see it just as another possibility to what CAN happen. There are many possible outcomes in economics and I think that both are equally as likely. It depends on what kind of people the actors are.
nice
cabi5boh! First reward over 300$ ! you got in steemit!! :)
Agreed. It remains to be seen how a 100% annualized inflation rate will affect exchange rate and, consequently, the system as a whole, because all value in the system is more or less derived from the value of non-powered-up steem.
I have found out that many people, after successful whale fishing instantly did power down, because they are afraid steemit is not going to work, however it is not already said that all whales not selling will become bagholders.
In a paid out post (Woo! 90 cents) I already made (so I don't really get much if you upvote), I talked about the STEEM consolidation that we are going through right now.
I also agree with your analysis.
I checked out your analysis and threw you an upvote. It was a good one. I wish I saw it at the time, but even then my upvotes arent worth that much.
edit: feel free to contact me on rocketchat in the future when you make a post like it again and Ill definitely read it!
@calaber24p, Enjoyed reading your blog, it is difficult to do that we must sekratif us to get an upvote from the pope the pope, to get the urge to blog that we created ..
Perhaps this could be the input for me to read your blog to thank for it all ..
nice analysis
You talk about game theory and don't give any mention to my series on the game theory of Steem?
Haha, nice article. I'm definitely going to be talking about this issue in upcoming articles, and I'm going to write an entrie article that uses game theory to refute your idea. I'm guessing that the main thrust of it will be that the whales face a tragedy of the commons - that is, every whale knows that if he is the only one who sells, then the price will stay high. Thus, each whale faces at least a strong temptation to sell. Anyway, my ideas aren't very well put-together yet, but I'll try to give you a shout when the article is ready.
Congrats on the successful post!
I would like to see your idea!
Sorry I havent come across your series on game theory before, but I just read some and it looks good :)
sounds good I would like to see your post :) the very nature of economics is to have multiple possible outcomes and possibilities. Thats why Harry Truman once said "If I only had a one handed economist" because on one hand something could happen and on the other hand something else. Let me know when it is done and ill definitely read it !!
Cool, I'll give you a shout.
And yeah, this is the trouble with econ and game theory - it's really not that hard to use it to "explain" any number of possible outcomes. :)
I agree with you to a certain extent. How would you explain the relentless oversupply of oil? Would these oil producing 'whales' not be doing whats in the best interest of the whole?
If so then why arent they?
This is a very interesting idea you brought up. Im definitely going to think about this more how it relates to steem, but the problem that caused oil to drop was basically for a long time you had an Oligopoly (small amount of firms selling a single good) that controlled oil in the middle east and decided to only let a certain amount flow out at a time. Now with increased production in various parts of the world , this Oligopoloy was forced to turn more into a competitive market which is why the prices fell. The oil prices were always inflated to begin with because an Oligopoly controlled the supply. I guess we can see something similar here, if one bad actor decides to dump at a massive rate.
We gotta take care of our baby, all for one and one for all! Namaste :)
Another reason why price is dropping is because the whales are all powering down which creates more of a steem supply. They are adding steem to the market and supply is greater than demand.
They are, but this could be seen as a good thing because speculators and those who arent whales already will be buying, thus spreading the wealth around and creating more people with the ability to do meaningful curation.
I agree with you here, it's often easy to get trapped into only looking at the decisions of others from your own perspective. This is a big game with lots of moving parts.
Supply meets demand. Each transaction has a buyer and a seller in either side.
I think that the market moves echo a fundamental change: Whales powering down are debasing STEEM.
and people cashing out of steemdollars are doing the same thing. Luckily, those holding their steem in STEEMPOWER(SP) are not being debased as they are largely protected by holding SP.
Imagine my surprise reading the article and then reading my name / reference for the bitcoin mining analogy... That was unexpected... :) Although it was Satoshi (proper credit :P) who calculated that it is in the best interest of the majority of the miners to not do anything silly (like abusing it, cheating with double spends etc) because the network would be undermined and thus the value of the coins mined would fall dramatically due to zero confidence in the currency.
hahaha your analogy was a good one so I wanted to give you credit for it! And agreed Satoshi and the developers here really deserve the proper credit for providing other types of incentives that work to thwart massive price fluctuations.
They do.. and they knew it would happen. But the fix is already in the system design. Time is all we need to fix it. We'll self-correct because that's how they built it. But by the time all the sellers of steem learn, those of us holding on will have already benefited. So there is no concern. Eventhough most people are concerned. That's the irony.
Crude analogy about the sheep as you have assumed:
The price the farmer got for the meat from butchering the animal was much less than the combined total of the wool sold over time.
Just saying to look at all the options in that one as it opens Pandora's box...
Its just an example to express my point. Obviously in the real world there are other factors at work, which is why we have both butchers and shearers.
Game theory is an important tool to understand complex and chaotic systems, such as those with humans making decisions based upon emotion (fear, love, greed, etc.). We use game theory quite a bit in the cybersecurity domain as well. It's strength lies in its ability to determine likely decisions paths at any given moment, by players in the model. Something which also plays well in the buy/sell world of financial markets. Cryptocurrency is no exception.
I like the application here and agree with @Calaber24p short and long term outcomes. Thanks for your analysis.
Humans aren't robots. We cannot assume enlightened self interest. As far as the price of Steem goes, will it matter? If Steem gets very cheap then it becomes more attractive for people who want more Steem Power. It allows people who have Steem Dollars to sell it for Steem and Power it up in the hopes the price goes up again.
Steem used to be 20 cents, and there is no reason to believe it wont go back to 20 cents again or at least under $1. We have to wait and see but I expect it to go under $1 for a brief while.
In fact, experiments have shown the opposite, people aren't entirely self-interested. Game theory has it's applications but they are limited. I can't say I ever ran across one that wasn't just something shoehorned into a situation. One of those was a game theory model trying to model systemic risk in the financial system, nice exercise but not very convincing. It most common in commodities for producers to do the opposite one might think. If prices are down, they will cull the herd and sell it off either for slaughter or alive. This is because their expectations are for prices to stay low, not just continue the trend necessarily.
The scenario here is a bit different. Whales have their profit and want to preserve it. Each downtick gives them angst and the future uncertain. Mkae of that what you will.
Game Theory is a really great area of study, especially because its a mix of economics and psychology . How do you use game theory in cybersecurity? That sounds really interesting. Thanks for the feedback !
Technology is predictable. Figuring out what the 'wetware' (i.e. humans) are going to do, is problematic. So we use game theory as a practice to both develop metric models as well as 'game-out' scenarios to see how the adversarial interaction may likely unfold.
The problem is that people undervalue steem power, much like the picture of this dog holding treats in his mouth in my latest post. I feel guilt if I sell STEEM.