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Today, the banking sector is very different from what it once was. In an effort to further facilitate the type of services demanded by customers, modern banks now need access to a wider range of interaction and transaction technologies and methods.
Although this may seem like it could cause more inefficiencies in the banking system, it can simplify the industry. This is due to innovations in blockchain technology and the source of game theory inspiration.
Banking as a Service (BaaS)
The modern banking system is the type that can be accessed on the mobile device when making a deposit with the photo or when transferring funds using Venmo, the traditional functions based on the BaaS (Banking as a Service) model. This gives consumers the ability to conduct regular banking without the need to find the nearest ATM or need to know the exact time the branch opens. This new BaaS model has been banking to gain representation from a myriad of features typically facilitated by third-party fintech companies.
These features are integrated into a unified banking system under a single brand. This flexibility can work beyond the integration of mobile banking applications. BaaS presents a level of flexibility that allows banks to integrate blockchain initiatives to address the problem facing the financial sector. According to John Nash, this problem is best represented by the prisoner's dilemma based on his contribution to game theory.
Game theory, prisoner's dilemma and Blockchain
Game theory is an aspect of mathematics that focuses on the strategic interaction between rational actors. The prisoner's dilemma is the most famous mental experiment in game theory. According to the experiment, there are two prisoners brought for interrogation for suspected participation in separate crimes of a similar nature. The sentence for both crimes is three years. But the police suspect that both prisoners A and B have worked together to commit a more serious crime involving a four-year sentence.
If a police offers an agreement and a prisoner chooses to confess that he has committed the most serious crime going on to involve the other prisoner, then the confessor will receive a lighter two-year sentence. While the other prisoner gets a more severe sentence of eight years. This only happens when a prisoner confesses, while the other denies it. If both confess, then they will receive the standard four-year sentence.
Suboptimal balance
Of course, the most practical option for both inmates is to deny any involvement in the most serious crime and get a three-year prison sentence. But since neither of the two prisoners can really be sure of the strategy that the other is employing, both people will choose to confess. Note that this is based on pure logic; if a prisoner confesses while the other does not, he who does not confess runs the risk of doubling the prison time. Confession is the perfect option that has in their circumstances something that Nash has observed as a non-optimal balance.
The illustration above is the exact situation in which the banking sector is located at the moment. Confidence among the main financial actors is almost non-existent. There is no transparency when it comes to conducting transactions. This leads (based on the thought experiment) to a non-optimal balance achieved in the financial sphere. This scenario can cause a systemic inefficiency which in turn can entail costs as regular audits will be required.
