How to quickly understand whether blockchain is expensive or not from the perspective of Nash equilibrium?

I often see people discussing the cost of blockchain (public blockchain), and strangely, there are often two opposing arguments:

• 1. Blockchain is free and low-cost;

• 2. Blockchain is expensive and wasteful.

Who is right and who is wrong?
Half of them are correct.

Let’s look at the first one: “Blockchain is free and low-cost.” This statement is from the user’s perspective. For users, when using a blockchain application such as Bitcoin to transfer money, they do not need to consider the operating and maintenance costs of Bitcoin. According to the Bitcoin protocol, users only need to pay a very small part of the transfer fee to make a payment. From this perspective, this statement is correct.

Let's look at the second one: "Blockchain is expensive and wasteful." This statement is from the perspective of blockchain designers or investors. Designers are well aware of the truth that "there is no free lunch in the world." In the design of blockchain, whether it is PoW (Proof of Work) or PoS (Proof of Stake), corresponding resources must be paid in exchange for the consensus and smooth operation of the entire system. In PoW, resources are the workload of miners; in PoS, resources are the money paid to purchase equity.

As for the blockchain operation mechanism under the Bitcoin PoW mechanism. As a distributed ledger, the distributed ledger incentivizes miners to maintain the system operation through the mining mechanism. And it does meet the needs of users who need to exchange value, and someone will use it at a certain point in time. Price speculation is the bridge between miners and users, that is, the tokens of the ledger generate prices because of the needs of users on the right, and miners implement token incentives through valuable tokens, and price speculators solidify price liquidity for both parties.

In the above operating mechanism, any link is indispensable: without mining, the system cannot operate without accountants; without users, the system tokens cannot generate prices; without price speculators, the token price lacks liquidity and miners are not motivated enough. On the contrary, if each link performs its duties, theoretically the above figure can form a closed loop, that is, a Nash equilibrium.

The definition of Nash equilibrium is: when all other people do not change their strategies, no one will change their own strategy, then the strategy combination is a Nash equilibrium.

Nash equilibrium has a very important feature, which is the consistency between belief and choice. In other words, the choice based on belief is reasonable, and the belief supporting this choice is also correct. Therefore, Nash equilibrium has the characteristic of self-enforcement of prediction: if everyone believes that this result will occur, this result will really occur.

Thinking from the perspective of Nash equilibrium, the self-fulfilling nature of the consistency between beliefs and choices enables blockchain to run stably like a perpetual motion machine in an ideal state.

However, does a perpetual motion machine really move forever? A careful observation of the above cases will reveal that to achieve Nash equilibrium, this perpetual motion machine still needs fuel. The fuel is firstly the user's demand for continuous use of the ledger, and secondly the demand for price speculation.

In fact, due to the strong trading characteristics of blockchain tokens, the price speculation and real user needs in the figure above are often mixed together and difficult to distinguish (not to mention that miners themselves are also frequent price speculators). Putting Bitcoin aside, it can be found that most blockchain tokens born in the past few years have a very low survival rate of more than two years. This fact shows that it is impossible to achieve the Nash equilibrium of blockchain operation by relying solely on price speculation. The operation of blockchain still needs to meet the real needs of users and improve the utility of user needs.

Let's take a look at the actual game between miners, users and speculators from the example of Bitcoin. First, with the competition among miners around the world, a new Bitcoin block was mined by a lucky person in about ten minutes, and this lucky miner also received a reward of 25 Bitcoins. (Note: With the halving of Bitcoin production in July 2016, there will be only 12.5 Bitcoins per block) Although he paid the corresponding mining costs (mining machines, electricity and other operating expenses), these 25 Bitcoins can still bring him income after covering the costs. The next step is for miners to sell Bitcoins in the market in exchange for the corresponding legal currency. This part of Bitcoin is digested through the speculative market.

If there is no real user demand, it can be found that the result of the above two links is that mining is simply consuming the speculative needs of the speculative market, and it is not even a zero-sum game. In this model, if the participants in the speculative market do not participate, the income is zero, and if they participate, the income is negative. As a result, the speculative market will not exist, and miners will lose the motivation to continue mining when facing Bitcoin without a price, and choose to quit mining.

If we look back at the development of Bitcoin over the past seven years from the above perspective, we will find that if its applications cannot meet the real needs of users, that is, if it does not have intrinsic value, it will be difficult for it to continue to exist and develop.

In my opinion, the selling pressure of Bitcoin caused by mining is transmitted to the real Bitcoin users through the speculative market, and the core purchasing needs generated by the real Bitcoin users and the selling needs generated by mining have formed a balance. For Bitcoin users, as long as the Bitcoin network can operate normally and can meet their needs and improve their utility at a lower cost compared to other value exchange systems, they will choose to buy and use it.

In this way, the Nash equilibrium of the Bitcoin system is formed.

Back to the question at the beginning: Is blockchain expensive or cheap? My answer is a bit tricky: as long as it can improve the marginal utility of real users, that is, as long as the blockchain has intrinsic value, no matter how expensive it is, it is cheap.