The Schelling Point: How Game Theory Helps Stablecoins Maintain Their Peg

In a world filled with infinite possibilities, finding a point of agreement or coordination can be a daunting task. 

However, there is a concept that helps individuals and groups overcome this challenge—the Schelling Point.

This article will explore this concept in the context of cryptocurrency, markets, negotiations, and other social situations.

Schelling Point Meaning

In game theory and social sciences, a Schelling point refers to a solution or coordination point that emerges as a result of individuals' shared understanding or common knowledge, even in the absence of explicit communication or coordination. The concept was introduced by the Nobel laureate Thomas C. Schelling in his book "The Strategy of Conflict."

Schelling points can be found in various real-life scenarios, such as meeting points, time coordination, language conventions, and social norms. They highlight the role of shared expectations and mutual understanding in facilitating coordination and reaching optimal outcomes in collective decision-making situations.

Schelling Point Examples

Geographic Locations

One of the most straightforward examples of Schelling Points is the selection of meeting points. 

Imagine two friends who decide to meet in a large park without specifying a precise location. 

Despite the lack of communication, there is a high chance that both friends will choose a popular landmark such as a fountain or a prominent tree—a Schelling Point that stands out as an obvious meeting spot.

Common Cultural Norms

Schelling Points are prevalent in cultural norms and traditions. 

For instance, people tend to celebrate important holidays on specific dates, even though there might be no inherent reason for those exact dates. 

Christmas on December 25th, New Year's Eve on December 31st, and Independence Day on July 4th are examples of Schelling Points in the context of shared cultural practices.

Decision-Making in Negotiations

In negotiations, parties often face the challenge of determining mutually acceptable terms without prior communication. 

Here, Schelling Points play a crucial role in finding agreement. 

For example, when buying a used car, both the buyer and seller might independently settle on a Schelling Point for the price, such as the Kelley Blue Book value, even without explicitly discussing it.

Schelling Points and Stablecoins

Stablecoins rely on peg mechanisms to maintain price stability to a specific target (often the US Dollar). One such peg mechanism is the Schelling Point.

The Liquid Loans protocol facilitates the exchange of 1 USDL for $1 USD worth of PLS.

As a result, 1 USDL equalling 1 USD is an “implied state” of the protocol. 

This could cause users to buy USDL off the market when the price dips below 1 USD with the assumption that other users will do the same. 

Conversely, it could cause users to sell USDL on the market when the price rises above $1, with the assumption that other users will do the same.

This market behavior is one of the forces which pegs the price of a stablecoin to its target value.

Schelling Points in Social Movements

Social movements often rely on Schelling Points to mobilize collective action and bring about change. 

A powerful example is peaceful protests. 

Participants independently decide to join a specific location, date, or time, creating a focal point that amplifies the impact of the movement. 

Schelling Points in social movements serve as symbols of solidarity, unity, and collective intention.

Schelling Points in Technology and Design

Schelling Points play a vital role in technology and design, particularly in user interfaces and interaction design. 

Designers aim to create intuitive and user-friendly interfaces by leveraging existing Schelling Points. 

For example, the placement of navigation menus, buttons, and icons in software applications follows established conventions, making it easier for users to navigate and interact with the interface.