In this section, we will see how game theory comes into the picture.
Game theory is the study of mathematical models of conflict and cooperation between intelligent rational decision makers. It is mainly used in economics, political science, and psychology, as well as in logic and computer science.
Sounds exciting, doesn't it? Let's see how it applies to Bitcoin's decentralized consensus.
First, we need to consider that Bitcoin mining is a capital-intensive business. This means that miners need to make a large capital investment in expensive mining computer hardware, also known as mining rigs. Bitcoin mining is so industrialized nowadays that most of the hash power comes from large data centers, also called mining pools.
Besides capital expenses in physical hardware, there are also substantial operating expenses to run a mining operation. Such expenses include electricity for running the computers and for cooling them off. Remember that Bitcoin is a global transaction network that runs 24*7, so mining computers run Proof-of-Work calculations non-stop.
On top of that, there are property expenses for the physical location where miners store their computers, internet bandwidth, maintenance expenses, and other operating expenses.
All these investments and costs are effectively put at stake by the miners and are a huge economic incentive for them to act according to the Bitcoin protocol. This effectively guarantees the security of the decentralized consensus mechanism and the integrity of the blockchain.
You may wonder: why is this such a solid guarantee?
Bitcoin mining is a very competitive business. Miners compete based on their computer hash power to be the first to solve the Proof-of-Work puzzle, mine the next block, and get the block reward. It is so competitive that at present it is considered to be profitable only at places with very cheap electricity. A naturally cold climate is a great advantage too.
Considering all these factors, the best course of action for any miner is to follow the rules, verify transactions, and mine blocks in good faith. This gives miners the best chance to generate revenues from block rewards, thus realizing a return on their investment.
If a miner doesn't follow the protocol when mining a new block, such a block will not be accepted as valid by the other nodes on the network. This means no block rewards, and substantial economic losses for the delinquent miner.