A Short Taxonomy of Prediction Markets

Transcript

good so basically a prediction market there's a way of tokenizing the future and basically I'll tell you what I mean exactly by that so basically what you have to do is you have to find an event in the future and for that event you have to find a complete set of mutually exclusive outcomes so as an example let's take the 2020 US election so basically you can ask who is going to be elected president in 2020 and yes and then you have a is this too loud sorry and then you have the then we have the possible answers so Trump Biden Bernie and something else happens so someone

else gets elected or there's no election or there's two winners and so on so basically that would be a complete outcome set and then the next thing you actually have to do and is you have to specify the so called Oracle so basically how would the prediction market know afterwards what actually happened so that's actually that's actually the trickiest part of this and then we'll come back to this again and again in this talk and then after that it's actually it's all fun and games and so you put some food ashore in that friction market and for that collateral you get equal amounts of all outcome tokens then you can trade out those outcome tokens so you could say I will

trade my Trump 2020 token or I will try to trade my bunny 2020 and how a token and in the end at the time of the resolution and only one of the outcome tokens will be redeemable for the collateral and all the other outcome tokens become worthless ideally the ones that actually happened so basically if say Trump wins again you will be able to redeem your Trump 2020 token against the collateral that was put in and the Bernie Biden and other tokens they will become effectively worthless okay I'll give you an example so in 2012 there was hurricane sandy and hurricane

sandy actually flooded one of the tunnels that the l-train in Manhattan actually you know between Manhattan and Brooklyn actually runs in so basically it had to go and it had to go had to undergo extensive renovations and that were scheduled for a year and a half so a year and a half of total closure of this tunnel and so the question in this the market is where the New York AirTrain reopen under the East River by July 2020 so obviously there's two possible outcomes yes or no maybe you know you actually have to define what do you mean by yes so basically only one direction opens is that yes is that no

and so on so basically but you have to make sure that you're covering alternatives and then you have to set an article so in this in this case you could say look we we are just simply checked the New York Times basically if this happens or this doesn't happen it is found to be reported in The Times because this is important to three million people who regularly take the El train in New York okay and then basically you create those tokens they can't write over the course of the breaker market at various prices on the dollar so basically safe the collateral is one dollar then basically if the yes token trades for 75 cents that means the market believes the probability of this of this happening is 75 percent and then in the end you check the New York Times

you you see that hopefully this will have happened because this is what my chart says and then basically the person hurts the people who hold the yes token will get the collateral that is used to back this contract um okay so what's super important to note is that you've if you have a complete set of outcome tokens this set is always worth exactly one collateral so that means you can create an arbitrary number of complete sets of outcome token and as long as you put in more collateral also means if you hold a

complete set of outcome tokens and always redeem that or one cholesterol the way see you say if it's a outcome market and who is the yes open and you want to get out of the market then either sell the yes token oh you can buy a note open then and then redeem yes and no token together because they're worth one plateau okay so I get asked constantly house is different from betting oh and betting what's betting website you typically you have a default counterparty and often known as the bookmaker and the market record as a bookmaker determines the price and there's no market mechanic and

usually once you're in you can't get out so basically once you buy a bet on a sports betting take you by iron eunuch to win the Champions League then you can't sell that next week when the chances have gone up or down for the same or different price you're locked in um okay so basically most of betting can be mapped onto prediction markets you know one to one but you know same could be said for insurance than many other financial products so Precure markets are super powerful tools in basically tokenizing the future and creating different futures that you can trade

okay so I promised you a comparison between different freakish markets and these are the ones I would actually talk about I will group them into three groups and one the almost prediction markets FTX predicted and me bad fair exchange then group to the product centered around other so aqua Baylin guesser and the group three the product centered around the noses conditional token framework an omen insight okay and the properties we will look at to actually see how these differ are same is first we will look at the outcome tokens so IV outcome tokens on chain are they can

totally custodial or are they non-custodial are they transferable we will also look at the market mechanism so it's an order book is their market mechanism it's an order book is it an automated market maker or is it something else that here we will look at the Oracle so the Oracle could be centralized it could be decentralized if it's decentralized the question is how exactly the how does it work and there also are click gnostic systems where base you can plug in whichever article you like best for that particular bridge market okay and this is the bonus category the legal strategy so basically there's different ways and that operators of prediction markets seek to limit their legal

liability so there's trading volume restrictions there's territorial restrictions some have you undergo kyc in AML some have some sort of regulatory license and some fully permissionless and have no operator and thus are not really touched upon by legal systems um okay group on oh and by the way if at any time you want to know anything more about these so basically i'm talking about a lot of product so let me know raise your hand and i'd be happy to go into more detail okay who here has been on fkx before yes

after yes good yes they're basically on FDX you can also trade Trump so basically I stay with the election for now so I try to stay with Trump 20 20 tokens for now just to make them a little bit more comfortable so if FDA is mostly known for you know they did a really good marketing push and with the so-called chip coin index which kind of catapult but I can't afford it them you know on to the crypto Twitter and people people know them so basically you can actually they have fatty liquid market for you know certain political predictions so say for

instance they have a Trump 2020 token so you can see that I put these last night so if this is our before Super Tuesday happened so bear that in mind so basically you can see that last night Trump plotted in this so first press up how are the fees the fees are super low so the fees on FDX are super nice and they can take it together always pay less than point one over percent so that's more or less unbeatable so let's look at the criteria that we talked about earlier so what about outcome tokens so after technically it's not a prediction market so technically it's a future so yeah see how I told you

earlier that in prediction market you always have to create all outcome tokens in exact equal measures this is not the case here so basically here you have a Trump 2020 future and you have a separate order book for Bernie twenty twenty twenty and Bloomberg Twenty twenty and so on so here you can just place an order on the Trump 2020 order book there are no Unchained tokens so basically that they're in a proprietary database owned by FTX somewhere you can't safe custody your own tokens they are always with FDX when they are no tokens so to say the market mechanism is a simple inaudible which works super well because these are actually super liquid markets the Oracle is centralized so FGX decides what

actually happened so whether Trump was elected press again or not and the legal strategy is that they at least hopefully so basically the legal strategy varies for different products so they have other derivatives that many more people can trade but for political markets a lot of people are excluded from trading lease so residents of the United States Canada European Union Hong Kong the United Kingdom Singapore the UAE Cambodia Turkey and it goes on so this is actually from that health of service and not a part of the strategy is probably that there are incorporated some and the Caribbean okay so and they they ensure this y kyc so basically if you want to

trade the Trump 2020 token you have to they ask you - they basically you can input them trade and then they say oh you have to go through kyc and then you have to upload your documents okay Nats FTS this is predicted who has traded on predicted okay so basically predicted there's something that caters very much to people like me so people who care cater who care about politics and who are not professional traders and who are not gamblers so predicted is super nice interface that's easy to understand for people who don't usually trade it's yeah so let me show you the 2020 the u.s. 2020 presidential election

interface so basically you can see you can you can you can buy Trump tokens you can buy no.1 Trump Ropin and so on and there's a couple of things you can immediately see ya what are the things you can note when you look at these numbers okay so the very very first thing is hope if you add up on the yet prices they are wavy there they are beyond the dollar and those aren't even our candidate so basically there's 18 more contracts for different candidates basically 5427 is like whenever eighty year one or something and then you have ninety eight and then basically way

above a dollar so that should not happen and also if you look at the best offers to buy yes and to buy no on the individual candidates the same is true so what does they tell you there's not particularly good liquidity on this market and I can tell you why it's super simple that's a lot of friction namely the predicted fees are enormous so basically you pay 10% fee on any profit you make and you pay 5% more to withdraw and you can only withdraw after 30 days so clearly for people who are in it for the money for you know professional traders or semi-professional traders this is an oboe and this also tastes so basically this is reflected in the legal

strategy so basically if you look at the outcome tokens there no unchanged opens the market mechanism is or the book the our current century so it's predicted and the legal strategy is the following so it's for us customers only which is super super rare so basically people always exclude us customers you have to go through okay I see you it's run by a non-profit namely by a university and you can only trade at maximum $850 per you unpredicted so very much it's it's for people who do this for the fun and I mean you can see that and the website okay so this is the last one from Group one who has been on Betfair before okay like one two people okay so bad fair

it's very much a betting site that's hardcore betting so if you don't know what you know a back end layers they already you have no chance of understanding what they're actually offering you you can actually see that they cater mostly to sports betting and but here and this way see here you can see there's one category called politics so let's go to that by the way this is bad fair exchange so this is a super this is a super crucial jungle center basically bad fair it's basically two products so better has a bookmaker who offer your odds and but there's also bad fair exchange where basically you can place bets against other users so it's peer-to-peer betting in a sense that is

called bad fair exchange and it's inaccessible for most countries so from from France from Germany from most places you can't go to bad fair exchange I tried it with my VPN and the only place where I would really let me was the UK okay so these are the particular markets for a bad fair exchange and you can even see in this terminology back or lay on and so on and that it's it caters to two camping people or to betting people yeah it's got medium liquidity so basically if you look here so basically on Joe Biden you can add the at a fairly good right you can put 83 pounds or 30 pounds 12 pounds on Bloomberg although I

would advise you not to so what are the fees like on Betfair so it's five to two percent so if you're a first-time trader its 5% if you trade a lot it goes down to 2% over time and they only they only take these on winnings and again there's no unchain tokens it's all in a proprietary in a pirate Harry database the market mechanism is an order book and the arcanist extension centralized it's bad fare and the legal strategy is that it's the that better exchange it's very restrictive in terms of what kind of residents at let's trade and you also have to go through kyc to trade that you're eligible so why am I talking about all of these because you know

they're not friction markets but this is kind of what prediction markets compete with so basically if you can't compete with this then basically there's no point in doing this in a decentralized fashion okay so the second group let me see how much time I have and second group Koopas I'll go get Sam Baily so basically these are products that are centered around agua so I go into other in the most detail and then guess and Vera basically interfaces to the organ markets okay so our girl is a very different beast so aqua actually is an app only there's no web interface you can't place a prediction on a web interface you need to download the app you need meaning you need to make make it work on my computer which I haven't been able to do in the last I I did I did it when it first came

out and it worked but I haven't been able to get it to work in the last six months or so so I have to actually I won't give you my own screenshot I will give you pictures I put off the internet so let me run your own app to have a GUI to the blockchain and anyone can create a market on August it's not curated by someone so all of the other interface that we have seen so far it's curated by central party you kind of set and the markets okay so this is what your app looks like on it is super understandable there is a website that you can access if you also can't get there after work

predictions are global that is not actually run by the orbitrim that kind of compiled the list of the current e-liquid markets and here I filtered for all markets that have at least one ether of liquidity and currently there's four and some of them are somewhat conflicting so basically there's one that says we're Donald Trump you reelected in 2020 and then there's and basically augur says who do you want to then yes and then the last one is where Donald Trump we've elected and as president of the United States for the twenty twenty one to twenty twenty five presidential champ and always says fifty five percent yes and if anything that should be lower than the one above because basically it's it's two

frictions amalgam agent one a Trump gets elected and B he doesn't step down or dies or whatever before he's actually operated um so there's not a lot of liquidity currently in our markets which has to do with the usability so I talked about our version two is coming soon I haven't seen it yet but I've read the announcement so I will tell you about this in a bit but for now the auger fees so busy I told me that anyone can create a market and the market creator actually sets the fees and basically that they're restricted between zero and fifty percent but typically people choose single percentage a single single digit percentages and fees are only payable when the when the market has resolved so

the trading itself other than death gas does not incur a fee and because it is a blockchain only application without centralized part if you place an order you actually have to pay gas regardless of whether it's filled and if you revoke your order you have to pay gas again so basically there are certain things that are not great for the user but basically auger is happening this in version 2 so when I talk about this in a in a bit um so the outcome tokens are unchanged Hopkins and that transferable so basically if you buy them you hold them in your own wallet you can transfer them to whomever you want the market mechanism is in order to work and it's already nominated

in either the article is very much what augers business model is centered around so the way that it works is aqua has a native token the rep token and the designated reporter who typically is the market creator and has to submit an initial report of what actually happened after the market closed so based which outcome is the factual one and the rebbe holders then are under an obligation to review this to review this report and escalated if needed so maybe what what does escalation mean so if if they find that the designated reporter has issued a false initial

report they can stake their reputation against that and if basically the reputation stake reaches a certain threshold this this is reversed and the people who staked reputation they gain to make fifty percent on their stake so basically this can't be it can't be abused because basically if you stake your reputation maliciously someone sees that they can stay against your staking and then you have to take a large amount of reputation again um and they gain - and basically if you stake for something and you were wrong in taking for that you lose your reputation and the rap you that you saved okay so basically it's it's a really good process because just

the threat of having an escalation strategy um usually prevents that from happening it's not like um I mean we know this from from everyday interaction so if you sign a contract you don't expect to go to court for it but just because you could that means the other person's pub is most likely going to abide by it right so did despite the fact that no one actually has to enforce it okay so obviously got strategy so august legal strategy is basically code of speech in speech is free and they are not operating anything so basically everything is purely on blockchain and the users download the app and then interact with the blockchain directly

without actually having any part in this at all okay our version two they are updating a couple of things though so the first one is you can now use die as collateral this is fantastic because placing predictions in ether actually is chasing two predictions at the same time the first one on the price of either the second one on the on the market itself so basic that that's yes so basically that's fantastic the second one is they are creating invalid and the tradable outcome so the story behind this is the following as I told you anyone can create a market on and consequently you can't be sure that the market is where

phrase that the outcomes are complete or that the resolution data is correct so basically what has happened a lot in the past often maliciously is that people have actually put wrong resolution date so maybe I would if I were a scammer I would run a market who will be the next president of the US and then I would have say Trump Biden Bernie and someone who probably wouldn't become it like Tati gavotte and I would create those options and I would set the resolution for October 2020 so in October 2020 this can't be resolved because the elections in November so basically and what would then happen in the other interface is this would

have to be declared in in the outcome would have to be declared invalid and what that happens is that every other outcome is given an equal share so basically if you have four outcomes and one of them is Tulsi Gabbard and she always traded at 1% and then the scammer would have pulled up a lot of those tokens for 1% and then he paid out 25% upon the resolution of the market so in order to actually combat that they are now making invalid a tradable outcomes were basically if a market is clearly set up such that the it can't be resolved meaningfully people who would buy up be invalid outcome and it would be apparent to anyone that this is probably not a good market to trade on

and what they are also doing is the integrating and after you know the book fire 0x that means that you can then place orders and rescind them without paying yes okay so those are the color the the that was aqua any questions as to other non fantastic so guess is the first interface that actually interfaces to our markets and when I actually opened this what is they used to when I opened this last night and they seemed to more interface to predicted markets and there was only one let me show you how it used to look so this is how it used to look and so basically gasser curated six

different markets on over which they found to be to a half liquidity and be you know have consistent resolution details and then you could place your order through the through the gasser interface without actually downloading the agua app which was actually quite cool and about last night when I checked them out so they were more or less channeling predicted and there was one link to a Naga market up here that was literally the only one how many states were standards went on Super Tuesday and you couldn't when you clicked on it you couldn't actually place an order it always told you this outcome is currently not available um okay so basically gets the outcome talking to an alga the mapping mechanism

was an awkward the art who was auger and the legal strategy probably I'm just guessing was we're just an interface we're not doing anything we're just facilitating stuff so they did the exact same so pale slogan was prediction markets on everything by everyone so they curated our markets integrated a 0 X exchange integration so you could place orders and written them without paying yes and they offered you a speedier market resolution so basically on auger takes a couple of days until the until the the resolution process is over because people are given time to steak prep against the outcome that was that there was posted and so bail

actually lets you withdraw your money if you know upfront and takes like 1% for that for you know waiting for another six days or so to be able to withdraw their money and was discontinued in mid 2019 for legal reasons despite the fact that it they actually had that they would have me cback and had quite a lot of funding so if you want to set as he read the hoops the sunsetting announcement it's it's still on their homepage Bay Lavi oh okay so now I come to the third group this is the group that is built on the conditional token framework and for this I will kind of preamble this again with how the prediction the condition of focus token framework work so this is something that

was the token framework was something that was built by gnosis and you can it's freely available you can build on it so there's I probably should have put a QR code here so if you go to the gnosis website you can find it under the deaf resources and what it does is the following in prediction markets in principle you can use any token as a collateral right it's basically if you have a prediction market and friction market outcome you can use that outcome outcome token as a collateral for another prediction market so you can actually create like nested prediction markets so the way that that used to be say it's I'm going back to the election now so basically you have event layer 1 so that's ABC so let's say Trump Bernie

Biden and then you have high and low say V accompanied the economy goes up or down right so basically a would be Trump and League in high would be Trump and the economy goes up a low Trump and the economy goes down and so on so um if you actually look at this um there's no there's no good reason why you actually have to structure it this way you could also turn this around so you could also say my primary prediction market is is does the economy go up or does the economy go down and then your secondary layers who becomes president and if you actually compare these you can find that the net outcome tokens identical pairwise so basically Trump and the economy goes up can be

found here as well as here and Biden and the economy goes down can be found here and here and so on and but these tokens are not fungible so they are not the same token you can they should be what exactly the same because their payout conditions are exactly the same but you can trade one for the other just like that and basically what the conditioner token framework does is it combats that in in effect and what it does is it lets you register and so you have to specify a plateau and then you can register an arbitrary number of conditions that apply to that to that to that cholesterol so basic you were just specify Khan through

conditions namely who becomes president and that's the economy go up or down and then you you're get given are the possible combinations and these fungible and you only have like one set right so that gives you like a couple of advantages so as I said Trump and the economy goes up is the same as the economy goes up and Trump you can partially redeem so basically if Trump is already elected Trump and the economy goes up becomes the economy goes up because Trump has already happened can also buy baskets so you can say I want to have all tokens all outcomes they don't that are not a and you can split

positions after the fact so basically you can you can register a new condition and say not only do I want to know about the presidential candidate and the economy where that goes up or down I also want to know about I don't know coronavirus debt and you can actually append this after the fact and take the positions no agent who coronavirus kills everyone or not and you can also merge positions if things have happened or not happened okay so the way that that is actually handled is that it's a single smart contract which anyone can obtain conditions this means there's much improved gas efficiency for that lemak if the the only constraint is that you can only register 2256

conditions per outcome but i think we should be we should be fine for now and so basically what you do is you register condition and your call and that's it at completely permissionless and the next two products that i will talk about are both based on this so one being permission and one being fully permission this so basically they're kind of Jing yin and yang products if you will so in this aside this is the fully permission one that is built by gnosis so this is this is an over juice of a ship you can find it at site rpm it's currently in Peter the we're basically it you can place predictions on anything but sports so

this is an old prediction of the mighty collateral dye uptake in the beginning when it was launched and so you can clearly see that that people kind of trade on it and it shows good probabilities so what kind of outcome talk - does it use it it uses ESC 1155 which can can be put in the twenty wrapper you want to they can be trade traded on other exchanges the tokens are permission is so if you buy tokens through site you can use self custody them so we never custody anything for you and you can send them to anywhere so basically that's completely permission as it's just buying through site that is restricted the market mechanism is an

automated market maker basically what the automated who here knows how an automated market maker works okay like ten percent maybe so basically what you do is you fund a bot basically that will trade against anyone and the price is determined so much like unis walk so up so the price is determined by the demand so basically someone has to fund like the but with say a thousand dollars and then anyone can play the prediction at at that particular price in any direction but basically if they buy it if they buy up the price will move up with it the rhythm and if they move down the price will move up or down with them for the next person so that means the automated market maker you funded ones can never run out of money and ensures

that there's always liquidity the downside of an automated market makers that it restricts how much money you can put at any one probability because you automatically move the probability so by by by buying from the market maker so you can't put a limit order as such or you have to wait until it goes back to the price that you wanted so the Oracle is at the map okay so the market maker it's got an automated market maker this is only the amok and makers only accessible to white listed individuals we'll come to that in a little bit the Oracle centralized so basically Knossos kind of vouchers with our name and the fact that we

that you know the company that does this inside of notes is regulated and bad things happen to us if every school over our customers so basically this is I mean it's a very old-fashioned way of establishing trust but yeah so basically the our problem is hard and this is one way of solving it and the legal strategy is the following so basically we have a license for Europe to offer no limit forex markets on anything but sports to retail customers in Europe you will have to go through kyc and AMM other so basically it not it's not as nice as using a permission as for them product um and I should stress again that the base contract so basically the conditional token am contract this is the standard conditioner token contract

that any one of you can actually append to and you can also directive by these outcome tokens directly from the top from from the outcome token contract you just can't interact with the market making if you're not white listed okay so there will be fees so currently there's no fees but in due time there's going to going to be around 1% of trading fees and omen in if you wish it's exactly the opposite the are you know it's it's the same in many respects and exactly the opposite in some respect so basically the outcome tokens yes he 1155 tokens they're transferable the tokens are permission is the market mechanism is also an automated market

maker funded by the market creator so basically in in the case of site we had the market crater so we funded but in the case of omen the person who creates the market is funds in the market and the Oracle is plug-and-play so basic you can choose from any number of a different Oracle solutions or you could also just input a and address that basically gets resolved you get to resolve this so to a certain extent the suffers from the same weaknesses that Fargo also has so basically people maliciously creating markets that will be resolved in a certain way despite the fact that they make the appearance of being markets on something else and so on and the legal strategy is that there's very much no operator so it

belongs the interface so basically the contracts themselves their permission is there on the blockchain yes there's an interface that was commissioned and maintained by the DX Dow so basically it's it's kind of it doesn't really need a legal strategy per se because there's no one that owns it and I can do I have it okay I got one can I can I have one minute to show video I started late right okay so this is a video of Omani so basically it

shows you so easy there's different markets and you can create a market so base you type in a question so in in theme with today's you know Trump so with Trump get reelected in 2020 you pick a politic you pick a category a resolution date and you say basically who's the Oracle who's the arbitrator of the DX Tao decides wrongly then you fund it you say at which probability it's meant to start because basically you don't have to set it 50/50 probability and then you create the market and anyone can anyone can trade on it but the the thing that's really quite fascinating is it kind of it stands in

thoughts with the Oracle right so basically here you have to you have to either be super knowledgeable or you have to trust the market creator that the Oracle is okay that the Oracle is going to resolve this the way that it should be resolved in the end and creating trust in this way in a decentralized what is enormous ly difficult and even for things that should in principle beyond you know measurable on on chain I mean if you look at the flash law flesh loan hacks of you know two weeks ago or so and Unchained orchids are not infallible so basically there's ways to trick them and we have a lot to learn in terms of how to create Oracle's that are attack resistant and we think that basically for gnosis having having like this dual

solution where you know you could either do it in a permissions a-and you're knowledgeable enough to weigh the risks and benefits or to actually go the the old-fashioned way into this way the regulated company that will pay if they up is kind of a choice that we want to give our users are the users of friction Markinson cool thank you let me go back to the presentation net because I'm almost done so we have a notice ecosystem fund so basically if you want to build on the

condition a token framework or anything else that that we you know any of the other products that we offer go to this website check out the certain proposals you can also come up with your own proposal and we give out to give out grants of up to a hundred thousand dollars for this and basically we evaluate the month of months so basically you should have very quick feedback and we also look for people constantly so if you are looking for a job or someone you know is looking for a job please come to our green house page fantastic thank you guys [Applause] questions we're no questions that's a

bad sign oh one Oh fantastic do you happen to know oh sorry do you happen to know how much of the etherium market cap is currently tied up in prediction market yeah not a lot to be honest so basically other markets are a pretty low liquidity right now and basically it's it's I mean you can you if you go to prediction start global there is a there's a running tally but it's it's not a lot okay yeah so basically so far our markets have been

the most popular this is because the the omen and the site that I just talked about the basically site is currently in beta if you you can apply for being a beta tester it'll launch publicly in May also so basically the the way we've been working on this for a super long time and the thing is basically getting regulatory approval has taken us two and a half years for this so basically it's it's it's an uphill battle I can tell you and omen is I think I basically it's it's in the end of the hands of the DX Dow but I believe it's it will be live very soon right okay so we believe it will be live very soon thank you thank you John thank you

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