Applying Braess’s Paradox to Fintech (2022)
Some believe that the application of blockchain and cryptoeconomics to all facets on technology is as inexorable as the increasing entropy in a closed loop system. This is probably true in the extreme long term. However, in the short to medium term, applying cryptoeconomics to an existing technology company without assiduously analyzing all possible scenarios could result in an instantiation of Braess’s Paradox.
In 1969, a German mathematician named Dietrich Braess discovered that adding one or more roads to a network can counterintuitively increase the congestion and slow the flow of traffic. He used rigorous mathematics to prove this theory. Practical examples of Braess’s Paradox can be seen in Times Square. In fact, this theory is extensible to completely unrelated topics like the tension force in springs and competitive sporting events like the Olympics (Roughgarden, 5).
So how does this apply to fintech? If the designer of the game (entrepreneur) doesn't consider that players of the game are strictly selfish and strategic, mayhem can ensue. Despite the designers’ good intentions, a Nash Equilibrium in which all parties are monotonically worse off could result. The burden lies on the system designer (founder / entrepreneur) to anticipate strategic behavior, not on the participants to behave against their own interests.
For example, Facebook, or shall I say Meta, has received considerable vituperative excoriation from the public for its crypto project Diem / Libra. Zuckerberg and his advisors failed to consider Braess’s Paradox. Simply adding a new road to the Facebook network was a misstep and backfired. Similarly, other companies trying to embrace cryptoeconomics should meticulously consider and anticipate all stakeholder’s strictly selfish strategic incentives and resultant behavior. Few organizations have done this exceptionally. These organizations welcomed Byzantine and adversarial actors to their ecosystems. Their automated economic incentives were set up to make the price of anarchy as close to 1 as possible.
References:

No. 2814: BRAESS'S PARADOX by: Andrew Boyd, University of Houston, https://www.uh.edu/engines/epi2814.htm

Twenty Lectures on Algorithmic Game Theory by Tim Roughgarden, Stanford University