On Decentralizing Prediction Markets & Order Books · 2014-07-06 · On Decentralizing Prediction...
Transcript of On Decentralizing Prediction Markets & Order Books · 2014-07-06 · On Decentralizing Prediction...
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On Decentralizing Prediction Markets
& Order BooksJeremy Clark, Joseph Bonneau, Edward W. Felten, Joshua A. Kroll, Andrew Miller, & Arvind Narayanan
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Remove uncertainty about unknown events
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Sports Weather
Geo-!politics
Product!Completion
Politics
Market Share
Scientific!Discoveries Sales Awards
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Prediction Markets
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Prediction Markets
Obama Romney Johnson Other
Winner: $10 Losers: $0
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Prediction Markets
Obama $6.10 61% Romney $3.80 38% Johnson $0.09 0.9% Other $0.01 0.1%
Winner: $10 Losers: $0
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Prediction Markets
Obama $6.10 Romney $3.80 Johnson $0.09 Other $0.01
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Prediction Markets
Obama $6.10 Romney $3.80 Johnson $0.09 Other $0.01
Obama -$6.10
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Prediction Markets
Obama $6.10 $7.30 Romney $3.80 $2.65 Johnson $0.09 $0.04 Other $0.01 $0.01
Obama -$6.10
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Prediction Markets
Obama $6.10 $7.30 Romney $3.80 $2.65 Johnson $0.09 $0.04 Other $0.01 $0.01
Obama -$6.10 +$7.30
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Prediction Markets
Obama $6.10 $7.30 Romney $3.80 $2.65 Johnson $0.09 $0.04 Other $0.01 $0.01
-$6.10 +$7.30 = $1.20Obama
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Prediction Markets
Obama $6.10 $7.30 Romney $3.80 $2.65 Johnson $0.09 $0.04 Other $0.01 $0.01
-$6.10 +$7.30 = $1.20Obama
Immediately Realized
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Prediction Markets
Obama $6.10 $7.30 Romney $3.80 $2.65 Johnson $0.09 $0.04 Other $0.01 $0.01
Romney Johnson Other
-$2.70 = $2.65 + $0.04 + $0.01
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Prediction Markets
Obama $6.10 $7.30 $6.40 Romney $3.80 $2.65 $3.53 Johnson $0.09 $0.04 $0.06 Other $0.01 $0.01 $0.01
-$2.70
Romney Johnson Other
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Prediction Markets
Obama $6.10 $7.30 $6.40 Romney $3.80 $2.65 $3.53 Johnson $0.09 $0.04 $0.06 Other $0.01 $0.01 $0.01
-$2.70 +$3.60 = $0.90
Romney Johnson Other
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Prediction Markets
Obama $6.10 $7.30 $6.40 Romney $3.80 $2.65 $3.53 Johnson $0.09 $0.04 $0.06 Other $0.01 $0.01 $0.01
-$2.70
Romney Johnson Other
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Prediction Markets
Obama $6.10 $7.30 $6.40 Romney $3.80 $2.65 $3.53 Johnson $0.09 $0.04 $0.06 Other $0.01 $0.01 $0.01
-$2.70 -$6.40
Romney Johnson Other Obama
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Prediction Markets
Obama $6.10 $7.30 $6.40 Romney $3.80 $2.65 $3.53 Johnson $0.09 $0.04 $0.06 Other $0.01 $0.01 $0.01
-$2.70 -$6.40 +$10.00 = $0.90
Romney Johnson Other Obama
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Decentralization
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DecentralizationCentralized Market:
• Money escrowed • Shares escrowed • Proprietary markets • Match orders • Vendor lock-in • Adjudicate outcome • Go offline • Potentially transparent • High fees
Decentralized Market: • Hold your own money • Hold your own shares • Choose any market • Open order matching • Use any exchange • Trust agility • Fault tolerant • Transparent by design • Low fees
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DecentralizationCentralized Market:
• Money escrowed • Shares escrowed • Popular markets • Match orders • Exchange lock-in • Adjudicate outcome • Easily disrupted • Transparent by choice • High fees
Decentralized Market: • Hold your own money • Hold your own shares • Choose any market • Open order matching • Use any exchange • Trust agility • Fault tolerant • Transparent by design • Low fees
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Decentralization
Bitcoin
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KA KB
Bitcoin
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From To AmountK K 10 BTCK K 5 BTCK K 18 BTC
KA KB
Ledger
Bitcoin
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KA KB
BitcoinSigA(5 BTC)
From To AmountK K 10 BTCK K 5 BTCK K 18 BTCK K 5 BTC
Ledger
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KA KB
T-2351T-4528T-9636T-9833
T-9833
Miners
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KA KB
T-2351T-4528T-9636T-9833
T-9833
Transaction Pool
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Ledger
T-2351T-4528T-9636T-9833
Block 11
Random Miner
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Ledger
T-2351T-4528T-9636T-9833
Block 11T-0032T-4528T-2348T-8218
Block 10 Block 12
T-3421T-4832T-0341T-3499
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Design DecisionsUnderlying digital currency & block chain
• Extend Bitcoin • Altcoin (XFT) • Colored Coins
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Design DecisionsHow to Declare a Winner:
• Machine-readable feed • Trusted (human) arbiter • Miners vote • Users vote
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Design Decisions
Threats: • Wrong decision -> profitable • No decision -> DoS
How to Declare a Winner: • Machine-readable feed • Trusted (human) arbiter • Miners vote • Users vote
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Design DecisionsHow to Declare a Winner:
• Machine-readable feed • Trusted (human) arbiter • Miners vote • Users vote
Arbiters: • Choose who you trust (agility) • Low barrier to entry • History & external reputation • Trustworthiness built into price
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DesignNew Operations (Simplified) !
• OpenMarket( ) Description & Arbiter, signed by arbiter • CloseMarket( ) Outcome, signed by arbiter
!!
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DesignNew Operations (Simplified) !
• OpenMarket( ) Description & Arbiter, signed by arbiter • CloseMarket( ) Outcome, signed by arbiter
!• BuyPortfolio( ) Convert 1 XFT into complete set of shares,
signed by currency holder • SellPortfolio( ) Convert complete set for 1 XFT, signed by
share holder
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DesignNew Operations (Simplified) !
• OpenMarket( ) Description & Arbiter, signed by arbiter • CloseMarket( ) Outcome, signed by arbiter
!• BuyPortfolio( ) Convert 1 XFT into complete set of shares,
signed by currency holder • SellPortfolio( ) Convert complete set for 1 XFT, signed by
share holder !
• Exchange( ) Exchange shares for XFT between two parties, signed by both parties
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Design
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Order BookMost common: continuous, price-time priority !
Broadcast orders to Bitcoin-style network: • Nodes drop competitive orders • No way to establish time • Blockchain: updated in batches • Miners drop competitive orders • Miners front-run well-priced orders
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Order Book• Nodes drop competitive orders • No way to establish time • Blockchain: updated in batches • Miners drop competitive orders • Miners front-run well-priced orders
The best we can + support external exchanges
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Order Book• Nodes drop competitive orders • No way to establish time • Blockchain: updated in batches • Miners drop competitive orders • Miners front-run well-priced orders
Broadcast to all known neighbours
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Order Book• Nodes drop competitive orders • No way to establish time • Blockchain: updated in batches • Miners drop competitive orders • Miners front-run well-priced orders
Call Market: Market opens, orders pile up, randomly close market, match orders !
Matching: Lowest ask matched to highest bid until no more matching possible
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Order Book• Nodes drop competitive orders • No way to establish time • Blockchain: updated in batches • Miners drop competitive orders • Miners front-run well-priced orders
Miners keep spread: spreads can replace fees & miners can execute at best price (added perk)
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Order Book
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DiscussionDesign landscape, not a specific proposal !Regulatory issues: not attempting regulatory avoidance !Platform for other financial exchanges !Not suitable for forecasts about underlying currency
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Questions?@PulpSpy @realjoshkroll @josephbonneau@socrates1024 @EdFelten @random_walker
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