Topic: [WHITEPAPER] Decentralized Bitcoin Prediction Markets (Read 26344 times)

Tangential but looking at what happened with SpaceShipTwo if only there was a prediction market... a bunch of people seemed to be sure an accident would happen.

Developers are now actively working on this project. One of them is very busy, but wanted to find another C++ programmer to collaborate with.

Visit forum.truthcoin.info or email me for details.

It screws up the network effects. There are a lot of smart people working on Bitcoin, merchants accepting it, frontend developers, etc.

That's a lot to throw away. Then volunteers would have to look at updates to Bitcoin and copy them into BothCoin...big hassle.

I check: forum.truthcoin.info much more regularly than this thread.

"I actually designed Truthcoin as a side-chain (without knowing the name, and just hoping that someone else would figure out how to make one), so of course side-chains would be great. It looks like, instead of that ideal scenario, I may be forced to use my least-ideal scenario (at first), what I call "BothCoin", which is basically a true altcoin that, in addition to being spent like Bitcoin, can be spent on PM-trades. Its my least-desired plan, but you can't test something that doesn't exist."

Why is that? It seems better to me.

Hi everyone!

Fielding questions via email, twitter, and multiple sites, is getting difficult, so I've created a special forum just for this project: forum.truthcoin.info .

I hope you will help me grow the forum my putting your questions and ideas there, in a more centralized space where we can all learn from each other. Thank you!

This 'RepublicSpace' guy is some kind of bot which repost reddit comments: http://www.reddit.com/r/Bitcoin/comments/1ycjdi/whitepaper_decentralized_bitcoin_prediction/


Thanks! I hope you'll join our new forum at forum.truthcoin.info


I don't. I think that people would bet, in the meta-market, that the Decision "Will a consensus of voters vote against the truth?" would itself resolve to 'No'. Moreover, if they thought 'Yes', why would they bet that way (how would they know that the Yes result would itself be accurately resolved)?

I think your example might be mixing some GT topics. For a start, off-path reasoning (usually called off-the-path) must always be considered even if it is never experienced, because there is a clear relationship between the consideration and the experience. Imagine a magical prison, where as soon as anyone commits a crime, the prison magically becomes aware of this and teleports the criminal into a prison cell. In this world, probably no one would ever commit a crime (the 'path' would be No Crime), but this fact results from the fact that the prison has this magic power.

The protocol acts as law enforcement, but it is required in this case to build the payoff matrix. Second order prediction wouldn't offload anything without another Truth-Source.


I hope you ask any new questions on the new forum!

I don't think you read the document 3_PM_Applications.pdf, because it answers the vast majority of your questions. It explains how you can break up binary predictions into probability distribution functions over subsets of the domain (what are the chances btc will be 500 or above? $600? $650? $700?) all within the same market. It explains how to chain predictions together to define a matrix of probabilities for combinations of outcomes. So if Policy X is not enacted, will unemployment rise by Y%? What about the converse?

Those who do not have specialized knowledge should not be betting, as they will likely lose money in the long run. That is, unless they are hedging. For instance, if you're a farmer you can hedge against a drought occurring if a market exists to predict it. Another example would be for funding public goods. For instance, say you want a road to built from point A to point B and you think the community wants it also. You start a PM, specifying whatever level of detail is necessary, then release it onto the TruthCoin network. Everyone who WANTS a new road bets that it WON'T happen (it's a win-win situation for them), and those with expert knowledge of the local property rights, permits, etc will speculate. If enough capital is raised on the NO-ROAD outcome, then at some point it becomes profitable for anyone capable of actually building the road to go ahead and do it, buying up YES-ROAD shares beforehand.

Finally, the proposal is for a protocol, so it's up to the user to abide by local laws.

I'm not sure this works. Heritability of IQ isn't something that the lay-person knows enough about to place a bet. CAGW, GMO, (vaccines), people "think" they know enough ... but really they have bubble-think opinions. And any market would have to be placed around a binary event. Such a specific statement being proved factual or counter-factual within a time-frame. So, "Global Average Temperatures as measured by satellite, and not urban "hot-spots", will go up 3decC by 2025." Or something. That is a bet I would take if someone wanted to bet on it. I'm not sure how to structure this with GMOs.

This is the traditional role of prediction markets. Pretty fascinating at predicting "group" consensus with a group of people not just being polled. They were a self-selecting group that entered a poll because they were confident enough to put their money where their mouth was. For binary events, such as Romney vs. Obama's election, they were pretty good .... but really hovered around 45c/55c for a long time (out of a $1 pay-out). then rapidly shifted about a week or so before the election.

The government didn't know how to deal with them, so both the gaming (gambling) regulatory folks and the SEC ganged up and shut down prediction markets (esp. InTrade) in the US.

How do you think they will treat bitcoin? If it's money, your violating securities law (if not set up correctly). If it's not money (poker chips), you are violating gaming laws. And of course, the IRS doesn't care: they just want 40% of your winnings. Which is pretty crazy. You bet $0.60 for a $1.00 payout. And they take $0.40. No return. How do you see getting around this?

Very interesting. I started a similar thread some time ago (see https://bitcointalksearch.org/topic/prediction-markets-in-bitcoin-139227 ) and I am giving some thought to implementation strategies. I will read the whitepaper with great interest.

Narayanan's group at Princeton developed independently a similar concept using with competing arbiters: http://users.encs.concordia.ca/~clark/papers/2014_weis.pdf In their paper they compare their model with Truthcoin:

I am a fan of prediction markets too, after the OP is there more developments on this issue

I've really enjoyed reading your work. I'm a physicist, so the very idea that we can generate probability distribution functions for human actions is just mind blowing. I'm actually starting to learn some game theory because of it. Anyway, I have one question - do you think meta-predictions could counter attempts to game your system? For example, we could start a prediction market that predicts a consensus of voters will vote against the truth in one or more markets. The reason I ask is that Nash equilibria are supposed to make law enforcement unnecessary (For example, in the stop light game it's unnecessary to have a law against running the stop light because players have enough incentive not to). In the same way, doesn't the protocol act like law enforcement, and if so could such "second-order" predictions offload some of the work of ensuring players remain honest?

Plagiarism! Prove to us you aren't a bot.

http://www.reddit.com/r/Bitcoin/comments/1ycjdi/whitepaper_decentralized_bitcoin_prediction/cfjbh4e

I'm no developer but I'm certainly interested in prediction markets - I presume the major difference between what you're suggesting and what already exists (www.predictious.com etc etc) is the decentralised nature of the market. This is an excellent idea and I can see it providing many benefits in terms of futures markets and derivatives. However, could you explain why prediction markets would end contentious debates?

Hello again,

Happy to see that this thread has revived. I've made a lot of progress since the project first started, for example I'm nearly certain we can add Scaled claims (which take a scalar rather than boolean value). Instead of voting .5 for incoherence, voters pick an extreme (max or min, chosen as least-frequent choice within that maturation-ballot [this prevents any possible strategic upward or downward bias]) which robs the author of money in the same way. Check the new excel for my thoughts, the R consensus-code is already written (but I have yet to do an example-test).

First and foremost I would like to thank gwern from the bottom of my heart, for defending the project while someone else submitted it to ycombinator last weekend. I was on vacation and had only my phone, and it would have been tragic if an unexpected publicity-event had gone to waste because no knowledgeable people were participating in the conversation.




In https://github.com/psztorc/Truthcoin/raw/master/docs/1_Purpose.pdf I attempt to explain why Truthcoin would succeed where previous PM attempts have failed.

I actually designed Truthcoin as a side-chain (without knowing the name, and just hoping that someone else would figure out how to make one), so of course side-chains would be great. It looks like, instead of that ideal scenario, I may be forced to use my least-ideal scenario (at first), what I call "BothCoin", which is basically a true altcoin that, in addition to being spent like Bitcoin, can be spent on PM-trades. Its my least-desired plan, but you can't test something that doesn't exist.


I also came up exactly with idea 3, its not as good as you might think, because in Nash Equilibrium you still need an incorruptible way of determining outcomes (for the holdouts [even if it were never be used on-path, the game theory requires that the off-path reasoning be persuasive]). One holdout can cause you to have to research the issue, and once you've done that, it costs nothing to re-use that research for all other traders. So a losing trader can easily force the administrator to research his claim, if the administrator is not prepared for the possibility that he will be required to research ALL claims, than this can be gamed strategically.

The only way you can lighten that load is if you can actually pull some weight, you see?

2, as you say, won't really work. gwern has already perfectly explained the 'exit scam', which is yet another reason why I went with reputation-tokens (you want to keep them pristine so that you can sell them, allowing for 'non-scam exit').

1 is, I think, consequentially the same as 2, is it not?


Although I'm very happy to see all of this interest, I'm greatly concerned that many people are duplicating work...for example SchellingCoin, which won't work, contains many ideas I had over two years ago. I'm sad to see other people spending their time when I did all of this work and released it to the internet for free. Another cause for sadness is the attitude of many developers, who say "econ people shouldnt mess around with crypto they dont understand", and yet when the tables are turned these devs feel comfortable messing with econ that they dont understand.

I am also uncomfortable with the Silicon Valley style of "just publish whatever you're thinking, even if it sucks". I have basically the opposite style and feel a lot of pressure to rush things out.

Because perfect is the enemy of better.

A lot of solutions are proposed for PMs but all lack volume. Why no solution is proposed using bitcoin which has already a lot of volume and users? Will a solution like side-chains help to go in and out without liquidity concerns?

Great thread for all PM enthusiasts (like us www.fairlay.com)!

First of all I wan't to point out that even if we run a centralized PM right now we believe in a decentralized future.

We see our core tasks in:

• Creating and promoting interesting and well defined events
• being a place to discuss events
• Providing a convenient user interface to market data and placing new predictions
• being a trusted source with a good reputation in resolving events
  (In the decentralized version that would be a "stream")
  

All this task are required in a decentralized system as well.

At the moment as a centralized PM we also have the roll of a bank for storing funds.
Since we do not intend to run away with the coins this is only an additional risk for us and thus we would prefer other solutions.

Some ideas we had to at least kind of decentralize it:
1. We will publish a hash of every event description combined with the outcome "true" or "false" and sign the real outcome. Thus we can build up reputations and predictions can be placed completely independent.
2. With No. 1 bet amounts can be stored in a 2 out of 3 multi sign address. That would make it impossible for the central PM to run away with the money - just to choose the winning side. (of course this is only a little bit better, since the central PM could act as a bettor as well)
3. We though as well about finding a consensus by the user (to have less work by resolving events)
One solution would be that both sides put 10% more money in a multi-sign address. No the person that looses the bet can admit the loss and sign the transaction to the winner but he gets back the 10%. If none of both admits to be the looser we sign a transaction to the winner but take the 10% of the looser.


We think combining 1. and 2. and having multiple independent entities as described in 1. with a good track recored and betting on a consensus of these would be a good solution as well?

Or, where to you see advantages over this of Truthcoin?



Plz. allow me to answer some questions that came up in this thread (little bit off-topic):
Try fairlay: https://www.fairlay.com/event/new/
We promise a quick response!

That is our goal - and we are open very open for feedback.

I understood my mistake.
 Thanks gwern!

I don't understand what you're trying to say. Let me try to explain the chain of reasoning and maybe you can specify where you object.

Prediction markets are obviously useful, so that's not your problem.

Centralized prediction markets are useful, but not as useful as they could be - since just like all centralized services, they can be attacked, self-regulate into uselessness, or corrupt: IEM survives in the USA only by being useless, and Intrade illustrate both the weakness to attack (by the CFTC and US government in general) and corruption (embezzlement by employees drove it into insolvency).

Hence, a decentralized prediction market, where embezzlement is impossible, where USG cannot regulate it to death, is highly desirable and likely necessary if we are ever going to get very large liquid prediction markets with contracts on many things of importance to the world.

Now, it's relatively obvious how to implement most of a decentralized prediction market on a blockchain: the currency part is like Bitcoin, the contracts and purchases are doable with public keys. The one part which is not obvious is: how are contracts judged? This is very important since it's where the rubber hits the road and the prediction market is forced to mirror the real world and keep being anchored to facts. If the judging isn't done well, the prediction market will be completely useless.

You could have one person appointed to judge. They sign a message etc. But now you've reintroduced centralization and allowed for corruption or coercion: the judge can simply buy up a bunch of shares on the losing side, which will be cheap because they're going to lose, and judge the opposite of truth, and make a ton of money. If they've become trusted enough to judge many contracts, they get a nice big 'exit scam'. As the black-markets show with centralized escrow, this can sort of work, but it still isn't great, and it limits the growth of prediction markets: no one is going to invest, say, $10m of capital if it can all be stolen by one judge pulling an exit scam.

This sort of partially-decentralized prediction market might work, but it's not a very compelling vision and that may be part of why no one has done it. If you're willing to trust the judge not to scam you, you might as well go use Bets of Bitcoin or another Bitcoin betting service: they'll scam you at some point, but at least it'll be a conveniently-done scam.

How could you improve on this? Well, what if there were some way to 'spread out' judging across a lot of people? And incentivize them to judge honestly? And to defect against any conspiracy to manipulate votes? *That* is what Truthcoin tries to do. And that's the value that the SVD part of Truthcoin delivers: it removes the last and large part of centralization, producing a prediction market system you can genuinely rely on and not worry about being attacked by the government, embezzling employees, corrupt judges, etc.

BUT  this is not the issue I am talking about here.
The Truthcoin layer is utterly unnecessary for the PM! The prediction market (PM) exists in its own layer, following its own rules and inputs… The TRC layer is added below it only to take 50% of the trading fee. TRC does not provide backing or input feed to the PM layer.(or any other usefulness to the PM layer that I can think of) It exists to serve its own existence and follows its own rules for shares redistribution -rules that decide who will get more of the next round commissions from the PM’s trades…
Let me put in different way being right or wrong how the others will vote determines how much you will get from the next trading fees on the PM. I still do not get what utility of truthcoin entitles it (its holders) to those fees in the first place.

That seems like a severe oversimplification, akin to describing the stock market as nothing but 'buying based on how you think others will buy'. Yes, there's elements of a Keynesian beauty contest, but the fundamentals still exist: dividends are paid out or not, companies go bankrupt or not, and any traders who are totally unmoored from reality will discover that the hard way.

The easiest way to predict the resolution the majority will choose is to simply look at what the reality is. *Was* Obama elected? *Did* Putin invade Russia? etc. The truth is the Schelling point for all voters; how do conspirators know which way to vote on what contracts? Their communication will be unreliable and harder than the truthful voters, who merely have to look at a data source to decide; combined with the incentive for each of them to defect and screw over their co-conspirators, this produces a fundamental bias towards the majority voting for the true outcome, which produces a fundamental that voters must acknowledge or lose money, which anchors the prediction markets & prevents them from spinning off into navel-gazing.

Just like Bitcoin: if you can trust the majority of hash power (vote power), you're fine. If you can't, you're not.

Read the white paper! (several times) 
Great Idea! Well almost…

Let me get some things straight.
So the owners/voters try to guess what the others vote will be, and not what the actual outcome would be! Their incentive is vote with the majority not to guess correctly! If they want to gain by correctly predicting the outcome they must become traders! I.e. bet correctly not vote for the correct outcome.

The consequence of this is that their voting (as a whole, as a group) is completely unrelated to how well the market their supposed to care about performs. If they (as a majority) always get the prediction correctly or they are always wrong the actual (trading) market will perform as it wants- i.e. successfully or unsuccessfully based on totally unrelated factors (advertising, competition, fees etc.) factors pertaining to the trading market itself.
Which leads to the logical question – Why they are needed at all?
I have more points but let’s see if you will answer  this one first.

I've made a number of updates to the paper for clarity and accuracy. In particular, the Implementation Details section is much better and actually informs developers on how to implement the protocol (thanks to the individuals who wrote in to offer their comments).

I also "finished" the python version of the code for the consensus vote and trading, although there are almost certainly many bugs. The R code is more stable. All code is intended as proof-of-concept.

Nope. He's a True Empiricist and pretty cool guy though. Why do you ask?

(I signed my name "Paul", but of course if I were lying about that I wouldn't change my answer just because you've asked a second time).

Are you Robert Shiller?

That's a good idea. I'm intrigued by your link because although the content is very familiar to me I've never heard that term before. But clearly from your scholar search the fault is mine.

It might be better to use more standard terms... You can see a prediction market as a ensemble method https://en.wikipedia.org/wiki/Ensemble_learning which weights experts (users) by their cumulative score (money) on a series of predictions using a proper scoring rule of some sort. This interpretation has been explored by a number of papers: http://scholar.google.com/scholar?q=%22prediction%20market%22%20ensemble

Ok, thanks. This helps a lot.

I know I rushed that essay so its very help to see its weakest parts from a new perspective (many of your questions are actually not where I expected the weak points to be).

To answer your questions: yes meta-tool is a tool which "works on" (uses) a set of tools (so the PM 'includes' all of the predictive tools we use today). Amoeba is necessary I think, because if a new method is proposed it is 'absorbed' by the PM (I want to distinguish the PM (which is the blob) from the individual knowledge-sources (circles)). I'm surprised this didn't work, I think I will double that figure for two different questions to show the flexibility concept I was after. Fig 4 is attempting to indicate the proper interpretation of a PM price (the 'naive expectation' is someone's interpretation of a PM, for example : http://blog.foreignpolicy.com/posts/2012/06/28/can_we_stop_paying_attention_to_intrade_now , where the author apparently feels that 73% is magically 100%, but I thought that was clear so it is actually very helpful to learn that you did not take away that message).

I knew Fig 5 didn't really work when I made it. Basically it concerns people who "talk", or complain about, the current price. If these people truly disagreed (had better knowledge) they could trade on this information, but I argue that instead these individuals lack awareness of their own un-knowledge. This part will need a tune up.

The first Myth was directly to address that conversation we had about why exactly PMs work so well (because they integrate everything that people believe to work), and if we can continue to expect superior performance from PMs.

OK, I took a look at the 'Misunderstandings' essay and have the following comments:

-- What is meant by a meta-tool?  This may mean different things in different contexts, so it would probably be a good idea to define it here.  Is it understood to be an amalgamation of all the available tools?

--  I don't think the amoeba analogy is necessary.  I believe what you are trying to say is that a prediction market tends to weight more accurate sources of information (what you call tools) higher than less reliable ones.

-- Myth 2 appears to be debunking the idea that PMs are inaccurate.  Fig 4 seems to show that it reflects truth better than a naive expectation.  But is a graphic needed here?  Aren't you simply saying that PMs work?

-- I can't understand what Fig 5 is conveying or the myth it is supposed to debunk.  It seems to be trying to explain whether or not an individual with certain characteristics (expert, student, loser, fearful) will take action.  While this may be an attempt to classify behaviour as it relates to certain traits, I don't see how this has any immediate consequences or implications for a PM.  I also don't understand what is meant by 'Talks'.

Cool, please let me know if you have comments/questions.

This event was brought to my attention: http://blog.predictious.com/2014/03/01/we-wont-be-adding-a-contract-on-the-assassination-of-mt-gox-ceo/

This so-called contract is a flavor of "Public Good", which is called a Public Bad by those (such as myself) who feel society would be worse off if the contract helped enable the activity it describes (as crimes of all kind are an attack on the public).

As an aside, the version proposed on that website presumably did not include the LMSR or Schelling-Partition features that I describe to ensure that the provider of the good would actually be the unique recipient of the required money.

Of course the Truthcoin version could-and-would have those things, but I've thought about this in the past and never considered it to be realistic problem for the following reasons:

1] Firstly, the branches can claim in advance that they will vote .5 on anything they find to be violent or immoral, meaning the market fails to resolve into a State, and anyone who paid to list the Decision/Market gets less (probably zero) money. The branch has effectively 'specialized' into 'non-violent markets'.

2] Assuming a crazy branch, the contract needs to specify a time horizon "...killed before 2015". Too long (10 years) and the assassin will go unpaid for an inconvenient amount of time, and too short and the target can bet on surviving and "outlast" the time period, becoming richer. Incidentally anyone on a 'crazy branch' (Owners, Authors, Traders) would almost certainly be tracked by the NSA/FBI/Military and would (and should) be prosecuted for breaking numerous existing laws and disturbing the peace of society.

3] If those ideas don't appeal to you, you can simply bet on your own death, then fake your own death. It's inconvenient (and possibly traumatic to friends/family), but you get paid pretty well (money from your enemies, no less) and it beats dying. Modern law enforcement will even help you do this (so I read).

4] I have even more ideas, involving life insurance, buying up the branch (easier than it sounds), counter-exploitation of crazy branch, etc. Many roads lead to failure.

I don't really believe that people want this man dead, its normal to say (even believe) extreme things when you are angry. The site probably thought it would make "good press", as it is quite dramatic. I just don't see PMs as encouraging this behavior, as most murders are for extremely personal reasons (sexual jealousy, religion, political extremism) and not economic ones (rich people have way more to lose by going to prison).

PMs are new, and people don't understand them, which leads to fear.

Other thoughts: http://www.sirc.org/articles/policy_analysis.shtml

Enormously interesting. Top of my reading list.

Yes, PM_Misunderstandings.pdf (not the whitepaper), where I tackle the effectiveness of PMs head on. I kind of rushed it and the formatting isn't great but let me know. Its very short but there I believe PMs are extraordinarily misunderstood. That paper was written for a general audience, specifically people who have heard of PMs but aren't yet converts.


Of course you are right. All theories should survive the gauntlet of experimentation; this is the insight of the scientific revolution. I am trying push the envelope.


That is true, but people have been using bets to argue for centuries, as I just pointed out. Today, several people have standing challenges with no odds against, such as James Randi's prize (essentially a price floor at 100%). This seems to be persuasive.
Mitt Romney, barely a year ago, wagered 10 grand on live international television to rebut a comment from Rick Perry. This was less persuasive. Why might that be? If you aren't aware of this post, I found it so inspiring I committed the list to memory: http://www.overcomingbias.com/2013/07/why-do-bets-look-bad.html

OK Paul, if this is directed at me I will take a look at your writeup.  Understand that I'm not a finance/economics professional.  I'm in the physical sciences. 

I do want to comment on the valuable guidance that can be provided by experience.  I accept your claim that predictive markets should work based on pure logic.  But it doesn't hurt to have that logic backed by some experience -- you've done this by citing examples of predictive markets that are more than a century old!

Over the years of reviewing grant proposals and refereeing papers, I've learned to recognize some red flags.  One of them is: "This idea is simple enough that somebody should have thought of it and tried it by now."  It's extraordinarily rare to encounter a situation where a lot of smart people are pondering a problem and have something straightforward get overlooked.  This is especially true in business and finance, where fortunes -- not just scientific prestige -- are at stake.

Innovators will often attempt to make an extension of an established, working concept.  This is how I perceive Bitshares.  I don't need to understand the nuances of predictive markets, but if I accept that they work in the classic (binary) formulation it seems obvious to look for extensions and extrapolations.  Relax a parameter or two.  An exchange that doesn't require price feeds or deliverables is easier to implement than one that does.  Such an exchange provides advantages that should have made it spectacularly successful even if run by a central authority.  Experience tells me that since nothing like this already exists, the likelihood of it working on a decentralized blockchain is, well, open to speculation.

Year 1907:

Year 1651:

But my feeling is that we do not need to rely on experience to assert that "PMs work". I believe that, actually, it is a logical requirement that PMs are the optimal predictive institution. I wonder if you'll read my draft "PM_Misunderstandings.pdf" in the /docs folder. I'm not completely happy with the clarity of that document so you might be able to offer suggestions (in addition to finding it interesting).

Mr Larimer, I respectfully request that you keep any comments you make here related in some way to Truthcoin. I do not feel that your comment sets a good example of relevance. I realize that you'd like to talk about your project, but you have whole websites for that and I just have this one thread.

That aside, I have some comments about your post.

I feel that there is a definitional problem at hand.

I personally am using the term 'prediction market' to refer to an institution for trading special shares, which have a final value purposefully connected to the outcome of an event. As individuals speculate on this final value, a current market price informs the current probability of the event taking place. Other types of PM, for example "1$ for every Republican Senate seat", are just accounting rearrangements of the same structure. There is no requirement to literally limit PMs to an (0,1) range, but logically they would only trade between zero and the purposefully selected final value. This definition is supported by the economic literature, which we could consult, as well as sentance 3 of the relevant wikipedia article: "For example, a prediction market security might reward a dollar if a particular candidate is elected, such that an individual who thinks the candidate had a 70% chance of being elected should be willing to pay up to 70 cents for such a security."

I feel strongly that BitShares would not create PMs, so defined, whereas Truthcoin would. This isn't to say an alternative institution wouldn't have value, wouldn't aggregate information via trades, or wouldn't operate in a similar way (however, you cannot claim that BitShares will do these things "because it is a PM").

This reads like a BitShares advertisement, when my intent was merely to answer a question regarding a comparison. Truthcoin does not have margin calls and cannot force any trades, whereas BitShares can, as you restate here for some reason.

Truthcoin has none of this, and all markets are immediately (and permanently, thanks to LMSR) tradeable.

I doubt this would work because a data feed 'producer' would have a direct incentive to make longshot trades, falsify the feed, and rake in lots of money. Likely there would be many cases where the funds gained from the attack vastly exceeded those needed to keep the BitAsset pegged above 100. In fact that would probably cost nothing, as traders would anticipate the attacker to engage actively in the short-run manipulation required to keep the price at 100. Either way, this is not a proposal for a PM, it is a sketch of how one might assess data feeds (which themselves may or may not be involved with a PM in a yet-unexplained way), and it has nothing to do with Truthcoin and is therefore completely off topic.

Finally, as I already explained, the scope of this project is not continuous observations of time-series variables, but instead human-specified binary True/False event-occurances.

This is a good discussion and I do not want to derail the work presented in the OP as it is good work.   Here are some general concepts to consider:

1) A prediction market does not need to have a 0 to 1 range, though this is one form for a binary event. 
2) All trades are voluntary with the exception of a margin call on the short position when collateral runs low.
3) Once the market reaches a consensus that BitUSD should track USD players on both sides are placing a bet on the future consensus relative to the current consensus.   When the future comes, they will continue to place the same bet.  This process requires a bootstrap phase where an order book can be published without executing trades as well as a min market depth before trading can begin.  This establishes the initial consensus.
4) Given the fact that the BitAssets are created only by pairing short/longs both sides must agree to the price. 

So if there existed a trusted data feed, then it is possible to operate in thiner markets.   I do not believe BitShares functions well in thin markets.

What I would do if I were to build a more general purpose prediction market chain is the following:

1) Select a hand full of trusted data feeds
2) Create a BitAsset on the trustworthiness of the producer of the feeds... keep number of producers small so market depth is meaningful.
3) The BitAsset would be market pegged to below 1 for untrustworthy and above 100 for trustworthy. 
4) All prediction market bets based upon the data feeds would be settled only if the BitAsset of the producer of the feed retained a high degree of trust.

Now someone can simultaneously make a bet and hedge on the trustworthiness of the feed.  This would eliminate voting from the mix.

Agreed.  I spent a large amount of time searching and sifting through the often disjointed forum posts in an attempt to understand Bitshares.  Here's my takeaway:  We are being told to think of it as a futures market except that i) it runs until t=infinity without any kind of settlement/termination date and ii) there is no threat of delivery; no real asset exists that changes hands during the process.  Understand that there are no price pegs in Bitshares aside from a blind faith that market forces will properly value a string of alpha-numeric characters that are purportedly linked to a real-world asset or commodity.

How is the price determined?  Assume we have a medium of exchange (Bitshare) and an appropriately named BitAsset, eg. a BitUSD.  Also assume that a Bitshare has a non-zero value.  The BitAsset (I can't emphasize enough that this is ONLY a name -- there is no casual link to the physical asset) can be priced by the Bitshare.  Because a Bitshare has value greater than zero, there must be a ratio (exchange rate) between the BitAsset and Bitshare.  We can rightfully conclude that the BitAsset must have a value greater than zero Bitshares and less than infinity Bitshares.  Given that, we are then told the only logical conclusion is the market finds the true price, i.e. what exists in the real world. 

I can follow this line of reasoning until the claim that their "prediction market" forces a convergence between the price of a BitAsset and its real world price.  Why not some other finite price that depends on where the bid-ask prices pile up?  Again, the BitAsset is just a name.  Nobody trading on this exchange will ever take direct ownership of the commodity or asset it's purportedly tracking as in a stock market or Forex.  I see Bitshares as collective herd mentality at best and wide-open to manipulation at worst.

Prediction markets have been around for half a century.  They are known to work.  The extrapolation being proposed in Bitshares (relaxing the requirements for delivery and no settlement date) should have been thought of by a financial entrepreneur at some point.  I see no reason why decentralization and a blockchain are needed to implement it.  Yet there are no examples I can find to suggest anything like this has ever worked. 

What do I know?  Bitshares may work splendidly.  It may work splendidly for a while.  I sure can't prove that it won't.  But I (and others) don't understand it and for that reason I'm staying away.

There are other criticisms concerning the claim that holders of any BitAsset will earn a guaranteed 5% return, but that's a separate discussion and peripheral to the proposed pseudo-prediction market.  I don't want to hijack the thread, but I think it's important to distinguish between the various prediction market models being proposed for blockchains.

Ah good, thanks sportscliche for posting those.

From what I've glanced through of that extremely lengthy discussion, I finally would add to my comparison to say:
1] Truthcoin (in attempting to directly model a traditional prediction market) makes an extremely direct attempt to ensure that the winning state of a market will sell for 1 and losing states sell for 0. BitShares does not attempt to ever directly influence the price, and you have to hope that market participants give you the price you want.
2] Creating a new market appears to be much, much easier in Truthcoin (designed to do this all day, liquidity guaranteed) vs BitShares (apparently requires a whole new blockchain and new participants).
3] Finally, BitShares can force you to sell at the current market price, which seems unstable and manipulable. Truthcoin cannot force any trade.

It is very important for this community not to duplicate work, so it is good (and not a derailment of the thread) to have these discussions. However, I now feel that I've made a strong case for Truthcoin being an extremely separate and valuable project.

Bitshares was discussed at length on these forums when it was proposed last fall.  The questions in this thread have been raised before:

https://bitcointalksearch.org/topic/m.3214589
https://bitcointalksearch.org/topic/m.3036037
https://bitcointalksearch.org/topic/m.3205395
https://bitcointalksearch.org/topic/m.3282870
https://bitcointalksearch.org/topic/m.4621908
https://bitcointalksearch.org/topic/m.3610353

You can read through these and decide for yourself if they've been adequately answered.

Thanks for getting this additional info.

Regarding quote 1: I personally don't find a string of text "BitHillaryWinsIn2016" to be a convincing explanation. My understanding of BitShares is that it relies on infinite term arbitrage. However, if Hillary wins, who would then buy my shares from me for 1$? Who will trade them at all? Future value = 0, present value = 0. Is it not that simple?

I admit my low interest in exploring BitShares, as I was only trying to answer 'What is the difference [between Truthcoin and] the new BitShares approach?'. If anyone feels I could do more to answer THAT question please let me know. I am still of the opinion that BitShares is not a prediction market, defined as a place where people buy securities which are worth a certain value should an event occur, and zero otherwise. BitShares doesn't even seem to limit prices to a (0,1) range, but perhaps I have misunderstood this.

Regarding quote 2: I am (for the time being) personally more than willing to spend my valuable time answering ANY questions people have about the work I published. However, this is an entirely different matter from attempting to convince everyone of the merits of the idea. I do not expect everyone to agree, certainly not at first.

Reinterpreting that comment as the question "Doesn't the fact that the system use voting to establish consensus make it fundamentally flawed?": Firstly, the system does not use 'voting' to establish consensus, the consensus algorithm uses a SVD-modified weighed-vote for coin-owners only. Coin owners have the highest ROI when future trading is maximized, a proof-of-stake system. The most significant multivariate-outlier-voter loses the most coins in the following period, and has the lowest relative influence within the current period. When voters lose in this way, honest voters gain, so every single actor has an incentive a] to vote honestly, and b] to lie about their voting intentions, discouraging cartels. The (required) accumulation of several votes into a Ballot is also a powerful decentralizing factor.

Figure 3 (page 28) best disproves the claim that 'only voting' is used. In it, the weighted votes for contracts C2 and C3 are split between Yes and No 50%-50%, yet the mechanism determines that C2 was 'Yes' and C3 was 'No'. This is because of SVD.

I doubt that Mr. Larimer seriously read and comprehended the paper in the 3.5 hours which separate those posts. His answers paint him as disinterested (which is fine by me).

This was years ago (2004?). It became hard to get money in and out of my account in Ireland and the contracts became less interesting. Originally, if you followed the news and did some homework you could outguess the market as a whole and reap some profit. It seemed to me that over time the contracts became more difficult to predict and celebrity based. I didn't know about their recent troubles. Pitty. I'll offer my defense of prediction markets as penance for my derailment.

I would love to see a good implementation of a prediction market in bitcoin. I think it could serve a use beyond speculation. It could be a new important media source, even an everyday app for making decisions. In the famous story about the discovery of the "wisdom of the crowd", Francis Galton finds the best guess as to the weight of an ox is a large sampling of guesses. What is less emphasized is that the guesses were actually bets. By adding a scalable risk and reward people are encouraged to act in their own best interest thus doing better research and mitigating personal bias. In aggregate the results reflect more than say a poll. A poll is a better gauge of what people are willing to say than what their internal best guess is.
In the future I could easily see monetized crowd sourcing for all sorts of decisions. Some people would pay a lot of money for best guesses now. Intrade was a goto for many in the press during elections. Anyway, I'd be interested in it.

The way that it forms the consensus on the prices of assets and thereby how to collateralize these assets is based on the same underlying premise as any prediction market.

Just from glancing at it now, it seems that BitShares would be for a continuous price/time-series on an asset that we expect to never be removed from popular exchanges such as the DJIA, Oil, Gold, whereas Truthcoin is for binary (settling in finite time at 0 or 1) events which do not have to exist anywhere else.

From what I can tell, BitShares is actually not a prediction market. How I can use BitShares to bet on the Election of Hillary Clinton as US President in 2016? How do I collect money if I am correct? etc.

Instead it appears (and claims) to be a fully collateralized bank for paper assets, using a custom currency they can suck away from you. Debt seems to be created with every transaction so it will be interesting to see how stable these markets are.

You're quite welcome.

Some opinionated yet informative links:
http://www.forbes.com/sites/timworstall/2013/03/11/intrade-closes-its-doors-but-why-is-this-another-mf-global/
http://www.foxbusiness.com/on-air/stossel/blog/2012/11/26/government-crushes-innovative-online-prediction-market

sorry for offtopic, but why is intrade currently deactivated?
You must have information about this when you were cleaning up on contracts there.


(shoot me a pm if you don´t want to derail the thread further)

what is the difference to new bitshares approach? - read their (new) whitepaper and for it sounds like a very smart system of implementing prediction markets

Thanks for doing this. Prediction markets are fun. I used to clean up on contracts at http://www.intrade.com/v4/home/
If you are a news junkie and regularly can see what is happening early on, you might like this a lot.

Surely you mean "can't elsewhere gain"?


The incentive structure for Authors (the people who create a prediction market) is that they pay fees up front, and get (1/2) of 1% of the total market lifetime trading volume. So any markets which are failing just will stop being made, and new markets will be tried by entrepreneurs who believe in them.

Nonetheless, if markets were created with low or even ZERO volume, these markets still have permanent liquidity thanks to LMSR (a clever but almost-completely-overlooked PM invention). One can always make a trade at the current market price, changing it to their preferred price (and probabilistic expectation), and profit from that trade (if they are right), even if they are the ONLY trader. So if you had insight you could still use Truthcoin to profit from that insight, in addition to speculating elsewhere. In fact (if someone else created the market) you'd have to be very lazy not to make a profitable trade, as using Bitcoin is far easier than opening an InTrade account. You could even make a 'billion dollar' trade, but that trade would itself cost you roughly a billion dollars as it would crash the price of your state into 1 almost instantaneously.

So even in this case the PM would aggregate all insights, obvious or otherwise.

If other people really want your info, they can make a very liquid market via donations ("Amping Beta") or dominance assurance contract, allowing you to make reap large profits on your large trades. Of course, to make a billion dollars in profit, you'd need to hope that other people donated at least that much, which they would only do if they cared about what you had to say.

I'm sorry for not being clear.  My point was that if I have any non-obvious insight into how Fed policy will shape the future, I can already make a billion dollar bet in other markets.  I don't think it's realistic to expect Truthcoin to do anything but aggregate obvious insights regarding future events that bettors can elsewhere gain as much exposure as they want to.

The only markets on InTrade that received any volume were the election markets.  There wasn't any other simple way for a bettor to gain exposure to those events.  InTrade got shut down for pissing off the CFTC by offering prediction markets on the price of commodities.  Those markets received no volume.

Hey I want to answer this question but I really don't understand your second sentence.

You might read another paper I placed into the docs folder, https://github.com/psztorc/Truthcoin/tree/master/docs , called Combinatorial Binary Prediction Markets.pdf, and if you look at Example 3 you can see how you can use these PMs to bet on the effect FED policy will have on something. If you make it to all the way to Example 6 you might see exactly how you can reshape the entire distribution of, for example, inflation outcomes, based on, for example, a FED policy decision. If your forecast is an improvement over the existing forecast, (and depending on how lucky you are), you can expect to profit.

If you have extra-special insight, you could actually create this market yourself, set the probability to what you think it is and bait other people into voting against you. On InTrade and predictious, you cannot create a new prediction market (although you can request one), and in fact I believe they are very slow and un-entrepeneurial in providing what people want.

Even with a large majority of attackers the Nash Equilibrium is a collapse into honesty, but only for True/False I'm afraid. You can find the 'voting strategy' section of the paper on page 11 in which I discuss all the bad things I could think of.

I applaud your creativity, but who is deciding the outcome of "On February 20th, Feed Y will be more trustworthy than Feed X,"? Presumably people would compare Feed X and Y to what-they-decided-to-use, which is probably just another corruptible feed.

I actually think this simple idea could be very useful though. If we say "Feed X to be 'accurate' through the month of March 2014?", we can at least audit a continuous feed. But what if the feed is mostly correct, with one wrong value out of 1000, or one missing/censored value. Is the whole feed wrong?

tl;dr A little of both. Truthcoin designed such that voters know what to vote without consulting any external source at all. Authors should not create high-search-cost-Decisions as they risk loss of funds.

INCENTIVE COMMENTS - Why centralization might not matter
I am of the same opinion of gwern that bad data will be ignored.

Firstly, I state in the whitepaper that these markets are only appropriate in certain conditions, one being low search costs (and I don't consider relying on an automatic feed to be actually 'searching for the information' at all, as the automation literally avoids doing just that, which implies that searching for the info was not worth the voter's time [ ie high cost] ). Much more on this later.

To the main issue: in order to prevent people from lying about reality, people vote in a simple binary True/False way but are actually punished continuously, such that the most deviant person is punished more (much more) than the second-most-deviant, and so on. Therefore actually every voter has incentive to actually lie to each other, including tricking rival voters into using a broken feed, hoping to fool someone into voting incorrectly. For this reason voters may anticipate that >51% of other voters have noticed and caught the error in the data source, and so themselves correct the error.

Additionally, voting involves investment. To vote, one one needs to buy some coins (or forgo the opportunity cost of selling preowned coins), and yet one only realizes the full benefit of this investment in the future, in the form of collected trading fees. "Screwing up" crashes the trust of the system, meaning low (or zero) trading thus ruining the profitability of the investment. For this reason, voters might vote against a bad data feed even if they believed that it would likely win >51% of the voting power. If the bad data successfully alters the network, all coins might be worthless, so 'risking' them on an honest vote (and just hoping and praying to grab the critical 51%) isn't much of a risk at all. Quite the reverse, actually.

So really it is a nice mix: traders are paranoid enough not to trust each other (which might lead to herding as you indicate), and yet greedy enough to cooperate to promote the value proposition of the service. It is quite a bit like Bitcoin mining this way, where miner-competition secures the network, yet the mining pools are ready-and-able to hold these emergency cooperation-meetings to solve Bitcoin problems.

Finally, different Truthcoin branches can change the decision fee magnitudes. Branches with higher decision fees are more profitable, and voters would have more to lose by disappointing Traders, and so more to gain by 'double-checking'. I once worked in marketing dept for an upscale trading firm, every single email, pamphlet, website edit was literally triple-checked by the hawk-eyed lawyers / grammar PhDs of Compliance. I literally mean three times by experts. Internal Auditing would regularly force someone to drop everything and spend a week preparing for what the firm would do IF we got 'externally audited' for the accuracy of our published claims (which, as far as I could tell, never even happened). Creating a new branch is (theoretically) very easy, so if some voter-failure is inevitable, competition should at least produce exactly an efficient level of failure.

SCOPE - Avoiding Centralization
Now my discussion of the scope of this project. I regret not specifying this in the paper as clearly it really is quite important.

Unfortunately, (and I mean it), I could not find a magical solution to everyone's prediction market problems. However, I focused on a design that should be able to accomplish "the easiest" PMs, like "Will Hillary Clinton win the US Presidency in 2016?", impending wars, critical regulatory outcomes, disasters, or breakthrough technological/biomedical research.  Items that, given the widespread nature of the info, and social benefits, we really """should""" have. I'm not a very emotional guy but I literally experienced sadness and disappointment, that we as a society (including Silicon Valley, scientists, philanthropists) simply did not care enough about progress to construct PMs ("institutions that actually work"). Bitcoin isn't perfect. For a while it was really hard to use, it still is to most people. 1 hour confirmation time? Soft forks? Having to spend days downloading and verifying the entire transaction history? legal ambiguity, crazy exchanges, network analysis of the blockchain, malleability, it goes on and on.

Yet Bitcoin restricted its focus to what it could accomplish, and so despite abuse it's still alive and kicking. I also placed restrictions on Truthcoin, but mine are easier to misunderstand. For example, early in the paper I note that the voters are instructed to vote .5 (the "information unavailable" vote [ recall that this vote punishes the Authors who created this Decision ]), even when the information IS available if THEY also DECIDE that the search costs of that info are prohibitively high (as in 'more than a google search')! I expect this attempt to generally fail, with voters doing a lot of extra research-work in the hope of not upsetting any Authors/Traders, thus improving "the service" but in the process opening up a can of systemic risk.

So Truthcoin was designed with a focus on after-the-fact outcomes of which everyone is already AWARE (as in, already thinking about RIGHT NOW, such as the identity of the US President). Because different humans can be aware of different things, the 'branching' capability allows us to cheat this limitation. "Truthcoin - Main" might be full of hobbyists who just google the latest DJIA, but "Truthcoin - Serious Finance - US CRUDE Wednesdays" might be a niche market with restrictions and incentives such that only professional oil speculators would decided to own those coins, and so they have absolutely no need to rely on any outside source because the information they provide to their branch every Wednesday evening was what they already spent their entire day doing. This is an extreme example to make the point, I don't actually expect to see a branch of this kind (but whatever the market will support is fine with me).

CONCLUSION
For these reasons, my expectation is that point 5) will actually not occur, because although lazy voters might (conveniently and efficiently) "auto-pre-fill" their Ballots, I expect them to be so paranoid as to at least glance over it manually to see if someone has tricked them into casting a vote indicating that John McCain was elected president.

For further thought: one idea I had to increase reliability at the expense of speed, would be to have multiple rounds of voting, where (for each Decision) the "newest" round is more influential than all previous rounds. Then, the truth would have to deliberately and slowly build up to some set parameter of "certainty", with attacks delaying this build up but not preventing it. As feeds would (we hope) eventually become correct, attackers would have to be constantly attacking the validity of the vote system. I concluded that that was overkill for the basic scheme but it might be appropriate for a branch.

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Now a rambling comment for EE about my failed attempts to create a decentralized time-series feed:

I get the feeling that you may be comparing Truthcoin and RealityKeys a little too directly (not through any fault of yours). As I indicated on Twitter, I feel the services are so different that they can hardly be competitors, with RealityKeys being a low-cost high-volume service and Truthcoin being high-cost low-volume (although with branching who knows). For starters the information in a data feed is generally not in anyone's awareness, because we've passed the job completely to robots.

Specifically, I doubt that this service will be used for 'feeds' at all as the cost would be prohibitive. Think about it: a time series needs maybe 10 partitions per time unit to guarantee any useful information. If you wanted a daily feed, that's 300 per month for one variable. I expected Voters to do about 100-200 Votes per month per "branch" (as in, in TOTAL).

"Why not have the voters just vote on a level, such as 4, 70, 8, instead of just on TRUE FALSE?" Well I'm glad you asked.
1] I exploit .5 as a maximally-uninformed outcome in 1 vs 0 land, whereas this is impossible with continuous variables because the mean, median, and mode a) are just estimates of 'maximally-informed' and not logical requirements for 'maximally-uninformed, b) can all be gamed, and c) are so flexible that I lacked the ability to even determine the entire attack space.
2] Confusion over rounding, units, language. Is 3.0104 different from 3.01040013? Which is better? What if the contract says "rounded to the 6th decimal place", but the 2-6th decimal places are zero?
3] PCA actually assumes that all the variables are normalized, implying a measurable mean and sd. What happens to those numbers if some lunatic with 1% of the voting power types in 6 quadrillion?
4] True / False harmonizes the units, which are identical [0,1] range, preventing the incentive scheme from varying with a shift in the average-unit-variability of Decisions.
..and MORE.

I did derive this insane way of doing a continuous ts variable "feed", which ended up using regular expressions to constantly search the marketplace for a set of markets worded in an pre-standardized way and determine the relevant range in which a continuous variable was expected to exist. Then I tried to make it so that entrepreneurs would always have an incentive to create-and-trade-in markets on a log scale as close to the real-world level as possible such that the range would shrink to an acceptable level of clarity. I could not figure out a way to make this viable. In fact I am going to have nightmares tonight just re-living this explanation.

There are two "solutions" to the feed problem: consensus/diversification, and incentivization.

The first involves either spreading your bets among different feed operators, or betting on a (trustless) "average" of feeds. If averaging, ideally the algorithm should weigh feeds somehow (e.g. by volume or transaction number), and creating a bet should have a nontrivial cost (to prevent fake volume).

The second involves incentivizing operators to report values "close" to the consensus. This could come naturally in the form of participants choosing one operator over another (we assume in this case that feed operators are "fungible", even though that isn't the exact definition), or users betting on a consensus value, with operators that report values "closer" to the consensus getting a larger share of the bet fees. As feeds ostensibly apply to actual truths about the world (as opposed to predictions, estimates, etc), I don't think the "lemming problem" is an issue here. On the other hand, I'm not sure how resistant this scheme is to cartels, but for any easily verifiable value (GDP, stock market index, temperature), collusion and cheating should be easily detected.

Not speaking for TruthCoin here but any prediction market, especially one that can be used anonymously, should incentivize you to bet on your insight in the hope of making money. When you bet this will move the price (at least somewhat) which will make that price a better indicator of Fed policy or whatever than it would have been without your participation.

Let's say I'm an actor with a non-obvious insight into the future effects of Fed policy.

How does Truthcoin incentivize me to add my insight to the market?  My status as someone with non-obvious insight into the future effects of Fed policy means my opportunity cost is rather high.

ah you are right about the "decentralized".
Fairlay is certainly not a decentralized prediction market.

People have been talking about doing fully decentralized prediction markets since forever but AFAIK the OP is the first person to publish an actual plan for how you might implement one.

seems like you are not the first one with the idea:
http://blog.fairlay.com/2014/02/information-should-have-a-price-but-a-fair-one/

Right, as long as the parties are able to make _individual_ judgements on which authority (or better, combination of authorities) to trust (eg they can choose when they make their contracts), it doesn't matter too much that there are authorities involved. You have a nice competitive mechanism that should tend towards good data, at a reasonable price. Handle the contracts on a p2p network and I think you have a very nice simple, robust solution.

The problem is when as well as handling the contracts on the p2p network, you try to take the decision about what authority to trust away from the individual parties and give that to the p2p network as well. (The proposal doesn't think it does that because it doesn't think it has trusted authorities, but I reckon in the real world it may get them whether it wants them or not...)

Trying to make the network do this via voting is a very interesting experiment and I'd love to see it tried, but I think it has some interesting potential pathologies...

That sounds like my scenario. The voters either notice the bad data coming in and ignore it when voting (similar to how people stopped paying attention to MtGox as it kept fucking up, and a scenario which doesn't require such pervasive incompetence on the part of voters as to enable the data source to do a 51% attack by proxy) or they do a bad vote and then people subsequently issue better markets worded to forbid use of the untrustworthy data source.

Your example doesn't address the bit that I'm worried about. The p2p witness system that has to get to a single consensus decision to settle outcomes is a different thing from the free market system that allows people to choose the best contracts. The latter is indeed self-correcting based on regular free-market principles.

Intrade settlement doesn't have an equilibrium to collapse into - it settles based on a single, central authority (itself), which is incentivized to supply the right data to encourage people to trade and give them a cut.

To illustrate, let me contrast how it's supposed to work to what I think could go wrong. (It might be that I'm just misunderstanding the proposal, in which case let me know):

A. Supposed to work:
1) Everybody makes an independent decision on whether X happened.
2) Everybody has an incentive to match the consensus.
3) The easiest way to match the consensus is to get the correct answer.
4) The answer with the most votes is the correct answer.

B. The way I think it could end up working out:
1) Somebody publishes a convenient data feed saying what happened, pulling from the BLS and a bunch of other sources.
2) 51% of users use the data feed, since it allows them to participate correctly in every vote.
3) Everybody has an incentive to match the data feed.
4) Anyone who wasn't already using the data feed uses it, or gets spanked whenever their judgement diverges from the feed.
5) The data feed produces bad data, because their systems are buggy or they're getting paid off by someone.
6) Anyone who gets the correct data directly from the BLS or wherever gets punished for it by the incentive scheme.

Now, it's true that the lucky monopolist who ended up as the Bill Gates of data feeds probably doesn't have an incentive to screw it up on purpose, and it probably won't be too bad in practice. Often the winners of natural monopolies are pretty good at their jobs - Windows isn't all that bad... But I doubt this is what the designers intend. You have a lot of cost and complexity with all the voting stuff to make the decisions about outcomes decentralized, but then you end up with a de-facto centralized structure anyway, and worse a centralized structure that's hard to fix if it goes bad. If you knew you were going to end up with authorities anyhow I think there would be simpler, more robust ways to do settlement. (For example, skip the voting and let people specify a list of settlement authorities in the contract and a protocol to choose between them if they diverge. That puts your settlement authorities in self-correcting free-market competition as you describe for contracts, rather than lumbering you with the one who won the battle to be the de-facto go-to guy.)

Anyway let's see what the OP says about the centralization issue - maybe I've misunderstood the proposal, or maybe they've got a solution to it.

[Lots of little edits for clarity.]

Alright, you didn't like my concrete example of why the system can be self-correcting; so could you offer a concrete scenario of how an existing prediction market contract from Intrade or somewhere could collapse into a perverse equlibrium? (Being partially centralized is not a bad thing: Bitcoin mining is pretty centralized these days. I don't mind if everyone is getting their figures from an authority like the BLS.)

I'm not sure this is as serious a problem as you think it is. I have a fair bit of practical experience with prediction markets (see http://www.gwern.net/Prediction%20markets ), and in the one I am currently competing on, the Good Judgment Project (part of the IARPA competition), there have already been some issues with judging and data sources. They still work. I'd expect the problems to be self-correcting (although I'm still reading the papers so I could be misunderstanding something).

So, suppose John Doe releases an annual contract for annual American GDP growth > 3%. It's the only such contract because it seems so straightforward and clear. Everything is going fine until one year, the number comes in on a knife's edge: if the GDP figure is seasonally adjusted, it's 3.01% and the bulls win, and if it's raw, it's 2.9% and the bears win. The right figure is seasonally adjusted since the non-adjusted version will be predictably wrong when the truly final figures come in years later, *but* everyone is terrified of 'the crowd' not understanding this subtlety, taking the raw number that all the newspapers are trumpeting, and punishing them for disagreeing, so they all vote for 2.9% and the correct forecasters are screwed.

And next year the same thing happens and the prediction market is terrible and cats are living with dogs?

No, not really. Next year, John Doe, having learned from the fiasco, will issue his next version with the tweaked wording 'American *seasonally-adjusted* GDP growth is >3%'. The problem disappears. Alternately: John Doe doesn't learn & does nothing differently, and instead, Jack Frost, angrily remembering how he was burned last year, issues his own variant; now the crowds have a clear interpretation of both contracts: Doe's contract is raw, and Frost's is seasonally-adjusted. Savvy predictors flock to Frost's.

Since everyone can create contracts, good contracts drive out bad ones.

The feeds aren't actually formally involved in the system as I understand it - they just have participants vote on each thing. What I'm saying is going to happen is that in practice everyone is going to pull their data from some kind of external data feed. Presumably they'll use whatever is simplest and cheapest, then they'll be stuck with that until it completely breaks...

This is actually a problem with a lot of situations where you are punished for getting out of line with the consensus. The market tends to settle on a winner early, usually the one that's easiest to get started with, then has a hard time switching off it, even when everybody can see that there are better options. MS Windows, PHP, the English language, Mt Gox, QWERTY keyboards, cities built on geological faults, etc etc etc. But this is built with a much stronger incentive to stay with the consensus than any of those, and actually deliberately discourages a coordinated attempt to switch to something else, so people may be stuck in the city even as they watch it burn...

I haven't read the whitepaper yet, so I'm pulling this out of my butt, but...what if we made a contract that said, "On February 20th, Feed Y will be more trustworthy than Feed X," where Feed X is the incumbent feed that you feel has been giving bad data?

What if there are 3 feed services and contracts were settled based on the feeds' majority opinion?

What if there were 10 services and contracts are settled on a supermajority of 80% of feeds? Otherwise, if you don't have 80% agreement, then the contract is a draw?

Like I said I haven't thought this through much. Maybe it's best to just dismiss my ideas.

This is very interesting.

If I'm reading it right, people vote to settle outcomes, under an incentive system where you want to:
1) participate in a lot of votes
2) avoid falling out of line with the consensus
? 3) avoid damaging your reputation ?

It sounds like the incentive will be for everybody to pull data from the same feeds, because that will be the easiest way to stay in line with the consensus. So you end up with whatever the feeds are that everybody coalesces around becoming the de-facto trusted authority that your network relies on.

This may not be a bad thing - presumably that authority will be motivated to stay reliable, and if they suddenly stop providing feeds, the network will be able to switch. But if the feed just provides sub-optimal data, or even starts providing outright lies, how does the scheme incentivize people to get back on the right track? It feels like once we're all pulling from Feed X, anybody who tries to deviate from Feed X is going to get spanked, even if Feed X is now full of shit.

Doing this with consensus witnesses is a hard problem compared to the problem Bitcoin solves because in Bitcoin all the nodes have to do is execute some extremely cheap scripts and timestamp the results, which is so simple and hard to screw up that there's no point in trying to pull that information from a central authority instead. Just run the software as designed and you'll stay in line with the consensus. (Although even there, miners tend to organize into pools and outsource their "voting" to a small number of pool operators...)

Disclosure: I run Reality Keys, which is a centralized authority for certifying facts that among other things can be used in an (otherwise decentralized) prediction market, albeit one that can be combined with other authorities and settlement mechanisms.

Love the idea -- once I work through the entire whitepaper I'll get back with some feedback.

Sure: https://github.com/PhantomPhreak/Counterparty and https://counterparty.co/wiki/main/

You're also welcome to register on the forums.

Like any other real asset, it is what you do with the asset that matters. There are currently a lot of junk assets left over from the development period on there; however asset issuances now cost a non-trivial amount of money, and recently the asset system has been proposed as a way, for example, for ASICMINER-like projects. The "lack of trust" is reflected not by who is using the system, but the fact that these operations (ordering, exchanging) do not rely on the presence of a middleman or escrow agent.

There is no way to make a fundamentally untrustable system (otherwise, no trades would take place), but there are ways to formally delineate boundaries of trust. As I mentioned in some discussion a while ago, "who do you trust? A stranger? Your exchange? NYSE? CNN? NIST?"

Hi thanks for your interest!

I can't seem to find the underlying logic of Counterparty. It seems that anyone can issue any asset they want. While that seems cool, it actually assumes counterparty risk is low, whereas my project assumes that everyone is untrustworthy.

Do you know where I can find a Counterpary whitepaper or code sketch? (other than the Readme which isn't bad).

Edit: I'm glad you mentioned this though as I think my project will rely on the same implementation strategy.

Hi; sounds like an interesting project. You may be interested to hear what Counterparty is trying to do (providing trustless, decentralized bets on feeds -- anything from coin prices, to weather conditions, to Super Bowl results.) Funding can also be achieved through issuance of assets, which represent shareholder interest. Alternative approaches are definitely welcome though; so far bitcoin lacks a truly robust derivatives market.

Hi everyone,

I work for the Yale Economics department (for a FED chairperson, in fact), and they very generously gave me 2 weeks of time off to make a conclusive effort on the project I’ve been working on in my free time for a few months, now. That good news aside, I’m feeling a little burnt out so I’m hoping to get some kind of support from the community or the project will probably stall out at this plateau.

Basically what I’ve done is built an incentive system which allows for the creation of Bitcoin Prediction Markets. As I mention in a first draft of my applications paper, these markets can be used for a number of purposes:

1.   Use the combined knowledge and intellectual ability of mankind to construct and refine the most accurate possible prediction of the future.
2.   End debates about the contentious issues of today, such as climate-change, heritability of IQ, effect of GMOs etc.
3.   Prevent lying from anyone (even politicians, industry leaders) about a target claim.
4.   Encourage and compensate whistleblowers.
5.   Provide ‘market advice’ on the relative impact of decisions on outcomes (“If we adopt X Fed policy, what effect on inflation can we expect?”).
6.   Provide insurance (buying and selling) opportunities for catastrophic global disasters, earthquakes, hurricane, etc.
7.   Allow tradable binary financial derivatives, for example on the BTC exchange rate, or the solvency of exchanges.
8.   Fun recreational gambling in real time, always at actuarially fair odds and low fees.
9.   Allows for the creation of ‘Trustless Dominant Assurance Contracts’ which allow financing of public goods such as lighthouse, roads, etc. with no counterparty risk.

Because the protocol (in theory) forces individuals to vote realistically on after-the-fact measurable outcomes, the protocol also has applications beyond prediction markets (as the Bitcoin blockchain has applications beyond transactions).
Here is the abstract to my paper:

 Abstract. Where Bitcoin allows for the decentralized exchange of value, this paper addresses the decentralized creation and administration of Prediction Markets (PMs). An alternative proof-of-work blockchain collects information on the creation and state of PMs, with the winning state of a market determined by a modified weighted-vote. An incentive mechanism attempts to guarantee a) that all voters vote honestly, and b) that PM-creators act as entrepreneurs, bearing the economic costs and benefits of the PMs they create. Bitcoin users can create PMs on any subject, or trade anonymously within any PM, and all PMs enjoy low fees and infinite market liquidity through a LMSR market maker. Scalability and customizability can be achieved via ‘branching’ (controlled-fork). The paper closes with a discussion of implementation details.

Hopefully there is enough interest to reach out to other collaborators (Bitcoin Foundation, Altcoin developers, etc.)
The entire project can ride on its own blockchain, or possibly even in the OP_RETURNs of the Bitcoin blockchain, no hard fork or any major change required.

I’ve avoided the final puzzle piece, which is how to have the protocol sign withdrawal transactions (for people to move their Bitcoin back into addresses they control). I provided 7 possible approaches, but even that was probably a waste of my time because I’m sure any professional dev would instantly know their favorite approach, and, (moreover) new approaches are constantly invented (example: Etherium was invented after I wrote the paper).
 
Thanks for reading!
-Paul

https://github.com/psztorc/Truthcoin/tree/master/docs