Prediction Markets - Not Just a Game of Cash
The idea of futarchy is closely related to the idea of prediction markets (PM). Since the ancient times, people have been betting money on a variety of issues from global trends to minor domestic issues. Sometimes the outcomes of these disputes depend on a chance, sometimes on a specific knowledge in sports (bets on competitions), economics (futures, options, other derivatives) and other areas, and sometimes they are based on the general erudition and intelligence of participants. Read more about the prediction markets here.
Sometimes, the purpose of these bets is not so much to earn money but is in searching for and justifying the truth, as well as checking the strength of the opponent’s beliefs. As a rule, the more money a bet setter is willing to risk - the higher their confidence in their rightness. In other words, PMs sometimes go beyond mere games of cash, and this significantly increases their social value. With sufficient statistics, the results of forecasts for prediction markets can be used to study real (responsibly supported by finances) public opinion, as well as the ability of citizens to understand the trends and consequences of certain phenomena, thereby contributing to the development of social sciences.
It is possible that if political PMs in the 20th century had been as developed as financial ones, humanity would have avoided major upheavals. Many disasters in history occurred due to a lack of human erudition in social and political issues (and lack of understanding of the consequences of various political tendencies). Perhaps history would have developed more humanely if monetary bets on political issues were common practice, thus bringing political literacy to the masses. It is not surprising that the well-known economists of the first half of the 20th century — Ludwig Mises (“Economic Calculation in the Socialist Commonwealth”) and Friedrich Hayek (“The Use of Knowledge in Society”) were among the first serious apologists of universal PMs (those allowing questions of any kind, not just financial ones). The views of both were largely determined by their frustration with the political events of their time.
The Idea of Futarchy
The ability of prediction markets to test the power of people's convictions has led Robert Hansen to the idea that “gambling” can be turned into a serious political system – a futarchy. The term “futarchy” itself was criticized by some authors, since it does not reflect the essence of the phenomenon, but only makes the assumption that such a system will be established in the future. But this does not detract from the value of the idea.
According to Robert, a futarchy is more rational than traditional democracy. Today, in democratic countries, the dominant principle is "1 person - 1 vote." Such a system does not take into account the degree of a citizen’s personal interest in a particular decision. If a person is completely incompetent, then that person may not come to the elections or a referendum. But many citizens of a low political cultural standing still go and vote on issues that almost do not affect have an effect on their interests. Often, they do so in protest or based on the knowledge that is a myth or a rumour. If one has to back up their vote with money, this will radically increase the voter responsibility regarding their decision. For example, if a certain country with a conservative population was to hold a referendum on the execution of all serial killers, then a significant part of its citizens are likely to vote in favour, even if their knowledge about these phenomena is based only on content derived from television programs.
But how will the outcome change if we apply Hansen’s futarchy instead of resorting to the traditional democracy? Will all the voters agree to back up their votes with money by taking quantitative responsibility for their decisions? What will the result of the referendum be if we decide the fate of people not by the number of votes, but by the amount of money collected in favour or against the motion? The outcome of such a vote is unlikely to be repressive. The highest rates will be offered by those for whom it is a matter of life and death. The smallest would be those whose knowledge is based on kitchen-level philosophising over a cup of tea.
In essence, futarchy is the same as PMs, but with one difference - the voters make bets based not only on their knowledge, but also on their interests. Undoubtedly, such a system also has disadvantages. If in a traditional democracy, there is a bias in favour of an incompetent majority, then in a futarchy, it is in favour of the wealthy citizens. But the specific details that could smooth out this problem (for example, the limit on the maximum bid) are still up for public discussion. In the meantime, as an experiment, futarchy is being tested on blockchain systems.
Futarchy in Amoveo and Its Advantages
Prediction markets (PMs) in blockchain systems are based on smart contract technology and need oracles. These oracles in Amoveo are directly based on the principles of futarchy.
There are two types of oracles in Amoveo: Question Oracle and the Governance Oracle. The purpose of the first one is to deliver information about past and present facts, thus ensuring the operation of the PM and other smart contracts. The purpose of the second is to manage the development of the Amoveo network itself. But the principle by which both oracles operate is very similar, since they ask participants a certain question and the community answers by placing bets. The winning outcome is the one that attracts the most money. Read more about the Amoveo oracles here.
To start off with, let us briefly review the work of the Question Oracle in the PMs.
Let one of the PM participants say that by the end of the year Bitcoin (BTC) will cost more than $8,000, and the other one will say that it will be less. We’ll call them players. Both players bet VEO coins on it, for the Question Oracle to be activated. If one of the participants wins, he will take all the VEO staked on that bet.
When the time comes to close the contract, the oracle sends the question to the network participants: Does the current BTC rate exceed $8,000? Those who are interested (let's call them a jury) should give an answer and back it up with money. Three types of answers are possible: TRUE, FALSE and BAD QUESTION. The jury independently ascertains the information and then answers by making their own bets. The option on which they bet the most is considered to be true. The winner among the players is determined on those bases. The jury that voted for any other answers loses their stakes in favour of the supporters of the winning option.
In fact, here we have two nested disputes. One is that the rate of BTC at the end of the year is unknown when creating a contract between the participants. And the second is that the rate is already known, and the jury team determines the winner.
Such a system does not guarantee that all of the answers will be reliable, as one can also present ambiguous options, which we will discuss in more detail here. But, at least, it is capable of providing higher reliability than a simple “public opinion” (the sum of the participants' opinions regardless of their degree of competence).
Now let us discuss how the Governance Oracle works.
The Governance Oracle only deals with internal network development. For instance, a question could be: ‘Should miners’ reward be raised to N?’ or ‘Should Amoveo be renamed to VEO?’ Just like a Question Oracle, a Governance Oracle relays the question to all network participants. But in this specific case, their answers are based on their interests, rather than their knowledge. Those in favour of raising miners’ reward (most likely the miners themselves) will bet on TRUE. Those, who don’t want accelerated inflation due to this change will bet on FALSE. After comparing all the bets, the oracle will raise the reward or leave them as is.
What does futarchy give here in comparison with democracy’s “1 person - 1 vote”? Obviously, in a futarchy, the probability of increasing the miner’s reward is higher. Miners are a minority, they are interested in increasing their rewards, but most ordinary users can vote against simply out of envy. In a democracy with universal suffrage of network members, it would be difficult for miners to raise their rewards. But in a futarchy, the average vote weight of the miner and the average user is different, since the miner is willing to risk money for greater profits, while the average user is unlikely to risk for a mundane reason.
The Amoveo futarchy provides for advantages both over oracles and PMs by other projects, as well as over blockchain governance projects. For example, BTC itself, where the weight of users' votes is not equal as it’s determined by the number of coins in their wallets. At the same time, only miners can vote. Such a cut-off helps protect the network from the most incompetent users, but it does not bring the level of weight in terms of responsibility that Amoveo has, as in comparison, Bitcoin voters do not risk losing money. Managing the BTC network is reminiscent of an archaic democracy with property qualification that is in some sense even less democratic than the futarchy of Amoveo. The betting system allows Amoveo to flexibly endow all users with the ability to manage the system in general, while protecting the network from “mob rule”.