People often ask, “What is Ethereum for?". Previous answers to this question often included the term “world computer”, but despite some interesting examples, it’s been difficult to answer this question at a more abstract level. I propose an answer to this question. I hereby propose,

Ethereum is an unprecedented arena for playing cooperative games.

And moreover,

Ethereum enables powerful economic vehicles we don’t yet understand.

Non-cooperative game theory, the original and most widely used branch of game theory, assumes the absence of an external authority to enforce rules. Fundamentally, I claim that the Ethereum ledger constitutes an incorruptible, omnipresent, external overseer that no matter the game is always available to enforce agreements among players. This implies that Ethereum, in theory, could turn any non-cooperative game into a cooperative game (sometimes called a coalitional game).

The transmogrification from non-cooperative to cooperative games is achieved by a technique we term Game Warping defined as using transparent, triggerable, unstoppable burns and on-chain side-payments to move game-theoretic equilibria or to create new player actions. Game Warping stacks as a new layer atop an uncooperative game to make cooperation the Rational choice.

Example 1: The Prisoner’s Dilemma

The most well-known problem in game theory is the Prisoner’s Dilemma—it is the quintessential example of a non-cooperative game in which the Rational strategy puts players into the worst possible state. Under Ethereum, I kid you not, the Prisoner’s Dilemma becomes a cooperative game. Say players A and B want to do something naughty. But before they commit their crime, they each deposit one million dollars (valued at 1000 utility points) into a smart-contract which states, “If I publish a defect message, my million dollars gets destroyed.” Now that the smart-contract is in place, as long as the police don’t offer more than a million dollars to defect, Rational prisoners will choose to cooperate.

In the original Prisoner’s Dilemma, Rational players will defect. But after the pay-off matrix has been warped to have a new equilibrium, Rational players will cooperate. See below,