ben-abuya - your time to think through these issues and share your ideas with the forum is much appreciated. I find your earlier exchanges in this thread with dacoinminster etc. very enlightning, In my opinion more of these types of 'visions' are required. It looks like rather sooner than later the first prediction market or Futures exchanges etc. annonunced on the forum will hit beta. Without thinking the bigger picture I fear we end up with 'Betfair Bitcoin edition', or 'BTC settled CME Futures' etc. and that would really be a shame, given all this potential right now!
Hopefully you take my continue nagging below in that spirit, hope people on this forum find some more time to explain their ideas.
I personally would love an open market system without accounts, without building reputation or trust (on the user side), without unreasonable regulation by unsuitable regulatory bodies, and most of all without all the time somebody telling what is best for me. Technologically, with the arrival of Bitcoin and all these ideas here, there seems to be quite a bit of progress going on.
[...] The way I see it is you're entering into a binding contract with the other side and the system has to guarantee payment. The only way to do that is to escrow the full amount. You want margin? Convince someone that you know what you're doing and get a loan.
[,,,]
Offsetting bets is an interesting question. Clearly it would be beneficial for the system to be able to reconcile offset bets on the same account. I'm not sure if that's possible though, since the contracts would be different and the system would have no way of knowing if the two contracts really do offset each other at all.
For me margining/offsetting/netting is key to prediction markets in general. There's really no distinction between a hedger with 'legitimate interest' and the 'bad' speculators/investors/day traders just selling to gain. Most hedgers will take both sides over time, in most cases fire-n-forget static hedging is impossible. Also, without the liquidity provided by participants other than hold-to-maturity participants most markets will struggle badly. Markets where you cannot get out before maturity won't attract deep volume. Why forgo additional liquidity if there could be a (technological) solution to have it both ways?
The topic of integrating conditional-transaction settlement in the blockchain has found lots of interest but also a lot of resistance here. I'd love to learn more about ideas how to allow anonymous offsetting or margining. Surely somebody has thought of it?
My take for offsetting would be that maybe you could prove to the conditional transaction settler (who admittedly is then not the blockchain itself) via revealing access to recieving addresses that you will gain a guaranteed pay-off regardless of the outcome, say of long/short positions in identical bets or deals? Then they could release portions of the funds to the recipients addresses prematurely.
And for margining, if you continue your thoughts about self-settling transactions in the blockchain: in a liquid market you could probably enter into forwards on forwards of ... of the actual deal? And each forward you would give a wide but finite initial margin built into the transaction. The side breaking the chain would automatically lose the remainder of its wide margin to the opponent, who then hopefully can close out in the liquid market.
Anyway, this are just crude and broken fragments. I really need the some of the smart people who discussed earlier in this thread to come forward and explain things clearly for the benefit of my tired and slow brain...please.
Bitcoin's greatest achievement is preventing double spending in a p2p system. Unless you know of a better way, might as well copy it. Bitcoin addresses timing issues partly by slowing things down. A block every 10 minutes is pretty slow. I think we can slow down prediction markets too. Prediction markets are made for hedging, not for day trading, so you don't necessarily need millisecond trade updates. Ordering identical-value bids and offers that go into a pool can be done randomly to ensure fairness and prevent gaming.
On the same note, I cannot see slowing down a market being a good thing. Somebody trying to make a market on a slow prediction platform will be taken apart by bots arbitraging out on traditional markets I guess, reducing liquidity and increasing bid-ask spreads needed in the first place? I think everybody profits from fast markets - the ones who like it fast can use it, the ones who don't care about speed can trade at any slower speed they want. Isn't that win-win?
The problem is not in the match-making bit of the system (I will try to write a more legible post later today to explain what I understand the 4 core components of a traditional prediction markets are). That can be made arbitrarily fast without Bitcoin confirmations. But as the guy running the exchange how do you guarantee your client that the match that hit his bid will follow through (maybe some kind of double-spending problem in Bitcoin language?) By the time it becomes clear the other one - who doesn't have a fixed account with the exchange - didn't deliver a confirmed transaction the first guy is pissed off because he is now unhedged and the market has moved or whatever his problem now is. You probably don't want to end up absorbing the loss, and you cannot ban the offender because you don't require them to register with you. Waiting for blockchain confirmation is probably fine if you can hold off shipping that flat screen TV, but I don't think it will fly for exchanges?
I think there could be simpler solutions to this particular subproblems, there were loads of discussion long time ago (Snack Vending machine problem), but maybe you don't need the nuclear option of an upfront escrow or similar techniques. Generally, I like to understand better how one could leverage of the possibilities offered by the existing Bitcoin we have now. I fully understand the resistance people have against changing it without need or without clearly thinking it through. If there is a half-way solution leaving core Bitcoin alone I already would be perfectly happy.