New Order: Money Meme – When Game Theory Meets Memes

Money Meme: When Game Theory Meets Memes

Original Title: The Memeing of Money: Game Theory Meets Memes

Original Author: New Order

Original Source: Medium

Translation: Lynn, MarsBit

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Introduction

It can be said that recent events in the market have been shocking. In the past few weeks, there has been a significant surge in meme coins, with a specific coin featuring the iconic meme character Pepe The Frog achieving an FDV of $1.8 billion at ATH. There is a great deal of public sentiment surrounding this phenomenon.

On the one hand, some people have accumulated generational wealth through a single trade, an unexpected windfall in their entire trading history. On the other hand, true innovators and pioneers in the industry express deep dissatisfaction as attention is once again focused on emotes and questionable businesses purely driven by greed, lacking substantial content, rather than recognizing the contributions of diligent builders.

Getting Started

The story of meme coins is fundamentally a speculative legend driven by social factors. Speculative legends can be traced back to the 17th century, when the Tulipmania occurred in the Netherlands. Tulips, once a symbol of Dutch identity, skyrocketed in price and then collapsed within a few months.

Fast forward to the digital age, Dogecoin was launched in 2013 (several years before Ethereum) and is perhaps the most famous meme asset. We all remember that with the support of Elon Musk and the Reddit community, its valuation soared to $50 billion in 2021. Currently, despite fundamental issues, its market cap remains around $10 billion with high daily trading volume. The recent meme coin season began in April 2023, with Pepe leading the way. Like its predecessors, Pepe uses internet culture and humor to reignite investor enthusiasm. Interestingly, meme Pepe has been part of internet culture for over a decade, but only now has it played a role in the narrative of meme coins. The repeated popularity of this meme coin highlights the complex interplay of various psychological and economic factors. We invite you to join us in delving deeper into this fascinating phenomenon on this journey.

About Memetics

First, it is important to determine why memes like Pepe, Doge, and Shiba were so powerful to begin with. The term “meme” itself comes from the field of memetics, the study of information and culture. Some branches of the social sciences consider it a pseudoscience, while others believe it is crucial for understanding how social and subcultural everything from family narratives to malicious propaganda is created and disseminated. From a memetic perspective, it is easy to see why these meme tokens spread so quickly relative to projects or applications that have more value. Memes like Pepe and Doge share some common characteristics, namely:

• They are easy to understand and do not contain abstract concepts (at least on the surface)

• The memes themselves evoke a certain degree of emotional mirroring or interaction; viewers can relate to the characters associated with the memes

• They have a high degree of appropriability, and can fit into any narrative or information, regardless of quality

• They often have a high degree of cultural circulation, and can identify individuals as existing within an “inside” group; this group can be as simple as people who understand the joke, or as complex as the entire token ecosystem

Ultimately, this cultural mix creates a foundational layer that is even more powerful than the most cutting-edge, profitable, and well-designed protocol tokens.

The Game Theory of Memetics

As we emphasized in the preface to our 2023 paper, this year’s market can be summed up in one sentence: “in the bear’s belly.” With market activity relatively calm, retail investors are increasingly focused on the social aspects of the market, particularly memes, which has spawned a localized bull market. Despite a lack of potential financial foundation, the rise of cryptocurrencies with memes as their theme can still be explained from various economic theoretical perspectives.

First, economist Robert Shiller’s concept of “irrational exuberance” may apply to the rise of meme coins. This refers to investors’ enthusiasm driving asset prices rather than their fundamental analysis, often leading to price bubbles where asset prices skyrocket to levels far above their intrinsic value. This negates the concept of market efficiency, where prices reflect the available rational information. Instead, meme coins seem to be an example of irrational exuberance, where price increases are driven more by internet hype (primarily on Twitter) and FOMO than any intrinsic value.

The intrinsic value of meme coins is not up for debate, but the concept is clearly fueled by many users searching for the next hundredfold or even thousandfold meme coin on Twitter, missing out on the target meme coin. The high engagement rate of such posts confirms this, as only industry giants like Vitalik Buterin can compete with such traffic.

Another interesting game theory concept worth exploring is network effects, which drive the value of meme coins. This principle suggests that the value of a product or service increases as it is used. This principle is often associated with the rise of social networking sites, indicating that as more and more people use our product or meme coin, they will discuss it, triggering a series of purchases and increasing its value. Theodore Vail’s advocacy of the network effect theory proposes that reaching critical mass – where a product becomes self-sustaining – is crucial for widespread adoption. Applying this to our actual example – it is difficult to find a point in a meme narrative that can sustain itself.

Meme coins are often evaluated based on their market capitalization. The ignition point is often considered to be higher than $100 million, and anything below that is “ngmi.” From this metric, the only meme coins that have survived long-term are $PEPE and $TURBO – meme coins that effectively blend the two most talked-about technologies in recent months – artificial intelligence and blockchain. This meme coin was actually created with the support of Chat GPT (it’s a fascinating story indeed).

However, from the current market capitalization, it seems that only $PEPE is “gmi.” Its current market capitalization is about $700 million and it is ranked 64th on the list as of May 15. It’s interesting to see if it will stay there in the coming months. Our prediction is that $PEPE will continue to exist, just like $DOGE and $SHIBA, whose values are questionable, but their market capitalization and daily trading volume are huge.

The classic prisoner’s dilemma and information asymmetry often lead to the sudden end of the so-called meme season. The prisoner’s dilemma is a concept in game theory that demonstrates a situation where two people may not cooperate, even if cooperation is in their best interest. This concept can be extrapolated to the behavior of meme coin investors. Consider two investors, Investor A and Investor B, both investing in a meme coin. Their choices are binary – to hold or to sell. If both hold, they may benefit as the token’s value may increase due to the scarcity of supply. However, if one sells while the other holds, the seller may profit at the expense of the holder. If both sell, the coin’s value may plummet, resulting in losses for both investors. The dilemma is that while holding the stock is in the best interest of both investors, fear of the other selling may prompt both to sell, resulting in a suboptimal outcome. Additionally, since all transactions are on-chain, users can easily track each other’s transactions.

As a simple example, a wallet ending in 609f48e33c received 2340B of Pepe on April 22, just a few days after its release. This wallet was marked by other Pepe investors as a “whale wallet”. Users are afraid of becoming liquidity exits, and every instance of sale from this address inevitably triggers a series of subsequent sales, even though they would be better off holding the asset together.

This lack of trust and cooperation is a common problem in the meme coin market, where value is primarily driven by speculation and investor behavior rather than intrinsic value. In addition, retail users are often aware of information asymmetry, where insiders (in this case, developers) have more information about the token than others. Although information asymmetry can have positive and negative effects on prices, sales in “whale wallets” are never a positive signal for ordinary users. Therefore, this is the main reason why most meme cryptocurrencies reach a certain market value – $1 million, $10 million, $100 million, and then decrease slightly. Once the whales start selling, the rest of the stakeholders will inevitably follow suit.

Industry Impact

The surge in meme coin markets has affected the entire industry. Many users have questioned the exorbitant gas fees on Ethereum and other on-chain networks. At one point, the overflow effect affected various chains including Arbitrum, and its fees increased tenfold.

While trading meme coins is important, a significant portion of the increase in gas fees comes from maximum extractable value (MEV) robot operators using sandwich attacks to gain considerable profits. In this strategy, attackers manipulate prices by sandwiching the victim’s transaction between their own two transactions, involving buying the victim’s tokens at a price lower than the market price and then selling them in the same block to make a profit.

The infamous anonymous MEV robot jaredfromsubway.eth spends about $1.2 million a day on gas fees for trading various meme coins, at one point accounting for 7% of all Ethereum gas fees. It has been reported that this robot makes over $500,000 in profits every day through sandwich attacks.

These technologies have introduced a clear concept built on information asymmetry – skill asymmetry. Many retail traders who entered the meme coin frenzy in search of the next thousandfold coin were not familiar with the blockchain stack, and users like jaredfromsubway.eth were able to benefit from their lack of knowledge, resulting in significant losses for those retail traders.

Conclusion

Finally, only when a person is fully aware of their behavior and can input a certain amount of behavior that they are willing to lose should they enter this game. Although it is often seen that wallets rise dramatically above the market average, these are outliers first and foremost, and the vast majority of retail users who enter this industry through such a frenzy will lose their “investment”.

It is worth noting that each such cycle will give rise to a wave of innovation. For example, in the meme frenzy, Yearn Finance introduced a tool that allows multiple tokens to be sold in a single transaction, optimizing gas costs, which is a tool that many retail users are hoping for:

In addition, while FOMO may drive users to initially flock to the meme market, some of them may stay in cryptocurrency, exploring its diverse use cases and protocols. The meme coin frenzy is an inherent aspect of the industry. We do not think it is either negative or positive, but we recognize that meme cycles are likely to repeat periodically. Just be careful not to become liquidity drained the next time it appears.

Note – NFA – DYOR (not financial advice, do your own research). It is important to note that while game theory can provide insights into the forces behind the prosperity of meme coins, investing in such assets carries significant risks. Their speculative nature, lack of value, and potential for fraud make them highly unpredictable and potentially harmful to investors. Before considering any investment in cryptocurrency, especially in meme-narrative-driven markets, it is advisable to proceed with caution and conduct thorough research.

Instructions: Blocking all articles only represents the author’s point of view and does not constitute investment advice.

Original link: https://www.bitpush.news/articles/4448220

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