Abstract
We consider a prediction market in which all aspects are controlled by market forces, in particular the correct outcomes of events are decided by the market itself rather than by trusted arbiters. This kind of a decentralized prediction market can sustain betting on events whose outcome may remain unresolved for a long or even unlimited time period, and can facilitate trades among participants who are spread across diverse geographical locations, may wish to remain anonymous and/or avoid burdensome identification procedures, and are distrustful of each other. We describe how a cryptocurrency such as Bitcoin can be enhanced to accommodate a truly decentralized prediction market, by employing an innovative variant of the Colored Coins concept. We examine the game-theoretic properties of our design, and offer extensions that enable other financial instruments as well as real-time exchange.
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Notes
- 1.
Each of them reached a market cap greater than \(\$20\) million in 2014, see http://coinmarketcap.com/.
- 2.
An example of a mistaken ruling is the 2012 Iowa caucus incident at https://en.wikipedia.org/wiki/Intrade#Disputes.
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Real-Time Semi-decentralized Order Book
Real-Time Semi-decentralized Order Book
In [7], a fully decentralized order book mechanism is presented. As discussed in [7, Sect. 6.1], this kind of a decentralized trading platform can work well by letting miners keep the surplus of the spread. However, it is inherently the case that decentralized platforms cannot achieve instant trades when responsiveness to real-time price fluctuations is desired, and that dishonest and self-interested participants can manipulate the market by placing orders and then reneging instead of fulfilling them. Therefore, in the case of a highly liquid PM, a fully decentralized order book might not be the best option for traders.
To complement the construction of [7], we outline an order book mechanism that is semi-decentralized in the sense that traders rely on a supposedly reputable trusted third party (TTP) to execute in real-time the orders that they place, and in case the TTP becomes corrupt they will regain their original assets. That is to say that a corrupt TTP can prevent trades from taking place, but cannot steal the traded assets and disappear.
The basic idea is to let traders deposit assets into a multisignature script that can be spent either by both the trader and the TTP, or by the trader alone but only after a specified time (cf. [23]). Trades are executed off-chain so that the TTP co-signs every transaction and can thus disallow double-spending by malicious traders. Each traded output uses a multisignature script of the above form, so traders are ultimately in control of their assets. From time to time, the TTP publishes the state to the decentralized Bitcoin network, in order to make the off-chain history irreversible.
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Bentov, I., Mizrahi, A., Rosenfeld, M. (2017). Decentralized Prediction Market Without Arbiters. In: Brenner, M., et al. Financial Cryptography and Data Security. FC 2017. Lecture Notes in Computer Science(), vol 10323. Springer, Cham. https://doi.org/10.1007/978-3-319-70278-0_13
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DOI: https://doi.org/10.1007/978-3-319-70278-0_13
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