- Is it good to bet using money?
- How to spread the use of prediction markers. Intrade legacy
- Blockchain as a tool to facilitate prediction markets
- The Amoveo approach to prediction markets
- The correct wording problem
Is it good to bet using money?
Monetary betting has been around for thousands of years — covering a wide range of issues from comical and superficial to deeply specialized and serious ones. Most often, those bets occur through an individual consent, but organized platforms such as Prediction Markets (PMs) can take it one step further.
The most popular use-case of PMs is sports-betting, with the participants meticulously studying athletes and teams in an attempt to make an accurate prediction and win some money.
Another industry where PMs are widely popular is finance. In its broadest sense, any market where participants speculating on price changes can be classified as a PM. But the most obvious example of a financial PM is a market for non-deliverable (cash-settled) futures and options. For example, non-deliverable futures for oil are, in fact, a dispute whether its price will exceed a certain level at a given point in time. Neither side needs the real oil, the important thing is to make a correct forecast.
It was always believed that any kind of gambling exploits dubious human feelings, such as greed, recklessness, and the desire for enrichment because of pure chance or talent, which are vices deemed useless to society. Due to this perception, even sports-related PMs are still banned in some countries. Nevertheless, PMs now have a chance to turn “mere gambling” into a very useful tool.
Gambling is a risk, and it’s actually not that common for people to win out of pure luck. In 2005, in his book “On Intelligence,” neurologist and founder of Palm Computing and Handspring, Jeff Hawkins, suggested that intelligence should be considered synonymous with prediction abilities. If we accept this terminology, then PMs in a general sense facilitate a competition of intellects.
Even when it comes to sporting events, bets are not made by chance. Punters are trying to assess whose chances of winning are higher. This requires in-depth knowledge of a particular sport and understanding of the current situation. Therefore, a specialist has more chances of winning. The same applies to disputes on other topics. A physics student who argues whether the Aufbau principle is derived from quantum mechanics, or a simple guy who debates whether Bob can ask out Alice, are both arguing about their respective knowledge areas. In one case, physics and chemistry, and in the other, in psychology and knowledge of the characters of your friends.
Oftentimes, the purpose of these bets is not just to make some money, but rather search for and justify the truth, as well as assess the strength of the opponent’s beliefs. As a rule, the more money a punter is willing to put on the line — the higher their confidence is. A PM can also be called a “truth serum”: financial interest forces people to not just choose a random option and hope for the best, but conduct an actual research and take a deep dive into the topic. This specialty of PMs places them outside the usual boundaries of “traditional gambling games” and significantly increases their social impact. With enough statistics, the results of PM-based forecasts can be used to study real, well-researched public opinion, as well as the capability of citizens to understand the trends and consequences of certain events, thereby contributing to the development of social sciences.
How to spread the use of prediction markers. Intrade legacy
While sports and financial Prediction Markets are now commonplace, PMs haven’t been as widely adopted in most other areas. Nevertheless, a universal Prediction Market is highly sought after, especially a politics-related one.
In the past, many rather disastrous events took place simply due to the lack of appropriate knowledge of socio-political issues among the general public. Essentially, being able to predict political events is as important as being able to predict people’s behaviour in our everyday lives. Perhaps, if monetary bets on important political events were a common practice, humankind’s history would’ve taken some drastically different turns, as people would’ve had a strong financial incentive to educate themselves on political issues. It is not surprising that Ludwig Mises (“Economic Calculation in the Socialist Commonwealth”) and Friedrich Hayek (“The Use of Knowledge in Society”), well-known economists of the first half of the 20th century, were among the first serious apologists of universal PMs (those allowing questions of any kind, not just financial ones). Their views were largely determined by their frustration with the political events unfolding at the time.
However, the path from theoretical concepts to practical application turned out to be a difficult one. The first major practical experiment took place at the University of Iowa in 1988, during which a market for political predictions was created in anticipation of the U.S. presidential elections. Several similar experiments also took place in the 1990s. The questions ranged from the potential box office revenues of Hollywood films to the possibility of cold fusion taking place spontaneously.
In 2001, intrade.com was launched, which allowed users to bet money on a wide range of issues. In fact, it was the first real exchange with such functionality. In 2008 and 2012, Intrade.com predicted the U.S. election results in various states around 70% more accurate that leading political scientists and polls.
This accuracy showed the potential power of PM, but at the same time threatened the current political system. The collective “serum of truth” that allowed citizens to see so far ahead has a potential of rendering most current political technologies, designed to sway short-sighted voters, obsolete. Moreover, PM could be used by lobbyists to directly influence the election results.
It’s unclear whether big-name politicians had a hand in this, but in 2012 the American Commodity Futures Trading Commission (CFTC) prohibited U.S. citizens from using the website. The official reason was financial, not political. As a result, the website lost a significant amount of users, its profits plummeted and eventually they had to shut down in 2013. Nevertheless, there’s still a lot of scientific and technical interest in the phenomenon of Prediction Markets, and enthusiasts are continuing their experiments.
Blockchain as a tool to facilitate prediction markets
In 2009, the invention of Bitcoin (BTC) laid a new technological foundation for the rapid development of PMs. BTC was based on blockchain — a system of distributed data recordings of all financial transactions put through the network (with almost no possibility of deleting or altering these records).
After a while, it became clear that blockchain’s capabilities are not limited to money transfers. A blockchain can store data regarding other people’s actions, for example, about their agreements. This function was first introduced by Ethereum (ETH) in 2014 and was called ‘smart contracts’, which are self-executing contracts that don’t require users to trust each other or use traditional legal procedures. In theory, smart contracts could be tailored for virtually anything, including settling bets on certain events. For example, two people can bet a dollar each on Clinton or Trump becoming the POTUS. After the election, the network uses oracles to fetch the correct results, and a smart contract automatically transfers the funds to the winning party.
When comparing blockchain-based prediction markets to websites such as Intrade.com, perhaps the most important advantage the new technology brings to the table is decentralization. The lack of a single server or an administrator solves two problems at once.
PM on a blockchain can’t be easily taken down, as there’s no single point of failure.
PM on a blockchain is better protected from any sort of tampering with the results.
As blockchain-based PMs are not owned or controlled by any party, no one can manipulate the outcomes to their advantage. On top of that, the blockchain technology enables PMs to leverage two very important features:
Full transparency of participants’ bets.
High degree of anonymity.
The former helps further protect the network from distortion or manipulation, while the latter allows users to freely express the most unpopular and frowned upon opinions, to be as honest as possible.
The first blockchain-based PMs started to appear around 2014, soon after Ethereum was created. Right now, Augur (REP), which was co-founded by Zack Hess, is probably the most famous one. In this article we will focus Zack's most recent project — Amoveo (VEO). Having learnt a lot from his previous endeavors, Zack took a lot of what his previous projects were doing wrong into account, making improvements on all fronts.
The Amoveo approach to prediction markets
To determine the winner of a blockchain-based prediction market (PM), oracles are required to supply the network with information from the outside world. The development of such oracles is not an easy process. In Amoveo, this problem is solved in an elegant way, described in-depth here.
There are two types of oracles in Amoveo: the Question Oracle and the Governance Oracle. The purpose of the former is to deliver information about past and present facts, thus ensuring the operation of PMs and other smart contracts. The purpose of the latter is to manage the development of the Amoveo network via futarchy.
The Question Oracle is used for the PM. Here’s an example.
Suppose that two PM participants, (we’ll call them players) are arguing: “Will the market cap of BP be above or below 150B pounds by year end?”. Both bet 1 VEO each on it. At the end of the year, the winner should get 1 additional VEO and the loser will have 1 VEO less.
When the time comes to close down the contract, the Question oracle asks the network participants: “Does the current BP market cap exceed 150B pounds?”. Those willing to answer (we’ll call them reporters) go on financial sites to find the correct information and answer the question by placing bets. The option on which they bet the most amount of money is considered the winning one. The winner among the players is determined on those bases. The reporters that voted for any other answer lose their stakes, which are then re-distributed among the supporters of the winning option.
In a sense, we have two nested contests here. The first one begins between the PM participants when BP’s end of year market cap is unknown. The second one goes on between the reporters, when the end of year market cap is already known, and the winner of the PM needs to be determined. However, strictly speaking, there is only one contest happening here: between the PM participants. When it comes to the reporters, if the oracle is operating normally, their only function is simply to report BP’s end of year market cap to the network.
The correct wording problem
If the question has a clear answer, the reporters will be in instant agreement. If one of them accidentally makes a mistake, he or she will simply lose their bet. But in theory, there could be a situation when the reporters will begin an actual contest. As a result, a controversial or an outright incorrect answer could “win”. We discuss such cases in section 5 of this article, but in the case of PM we’ll focus on just one of them: oracle’s mistakes caused by inaccurate wording of a bet.
Let’s assume that in the example above BP’s market cap on December 31 was fluctuating somewhere around 150B and was below that level most of the day. By market close, it rose above the 150B mark. Most likely, the majority will say TRUE based on BP’s final quote for the year. But some may say BAD QUESTION upon deciding that the end of the year comes at the end of the day, and not when the market closes.
Perhaps the most complicated scenario is when some exchanges show BP’s market cap going over 150B at market close, while others clearly indicate it being below the mark. Shares of BP trade on various exchanges worldwide and the price may differ based on the exchange of your choice. In that case, it stands to reason to answer BAD QUESTION, but even in this case other opinions are possible, as some members of the jury may base their answer on the final quote of any particular exchange.
These examples demonstrate the importance of precise and specific terms of the contract. Just like in real life, smart contracts should be created to take potentially ambiguous interpretations into account. For instance, in this case, instead of “Will the market cap of BP be over 150B pounds by year end?”, the players could use more precise wording — “Will the market cap of BP be over 150B pounds on the last business day of the year by market close on the London Stock Exchange?”.