The Era Of Prediction Markets Is At Hand

A prediction market allows participants to bet on the outcome of various events, including elections, the Oscar winners, the weather, business news, sports, and really any type of binary event – which allow them to predict either “yes” or “no.”

Past prediction markets have correctly predicted future events with an uncanny degree of precision. A University of Iowa business school project about prediction markets called the Iowa Electronic Market allows students to wager small sums of money on the outcomes of U.S. political events. It typically predicts elections within one percent, more accurate than polls or expert opinions. Since 1988, it has correctly predicted the outcome of every U.S. presidential election.

In a typical futures market winners earn money from losers, and sometimes from the people who ask the question in the first place. Such markets are becoming famous for producing extremely accurate predictions of the future, when people put their own money at stake they tend to make better guesses.

Unlike normal futures markets, the Iowa Electronic Market is not-for-profit; the markets are run for educational and research purposes. The introduction of substantial profits, or losses, brings with it the attention of regulators, which have a tendency to hamper these markets.

There have been several previous attempts to create a centralized prediction market, although the U.S. Commodity Futures Trading Commission (CFTC) is accustomed to having them shut down, as was the case with NADEX.

In an order prohibiting the North American exchanges political event derivatives contracts the CFTC stated that “The contracts are binary option contracts that pay out based upon the results of various U.S federal elections to be held in 2012. Nadex self-certified the contracts on December 19, 2011, and on January 3, 2012, the CFTC initiated a 90-day review period of the contracts.”

“As a result of reviewing the complete record, the CFTC determined that the contracts involve gaming and are contrary to the public interest, and cannot be listed or made available for clearing or trading.”
— – CFTC

Perhaps the most famous attempt at a prediction market was a popular website called Intrade. For a centralized market, run by a single authority, this private company based in Ireland did a lot of the things that modern prediction markets are trying to do, including allowing bets to be packaged up and traded as securities in their own exchange-like marketplace.

In November 2012 the CFTC filed a civil complaint in federal district court in Washington, DC, charging two Irish companies running the platform with “offering commodity option contracts to U.S. customers for trading, as well as soliciting, accepting, and confirming the execution of orders from U.S. customers, all in violation of the CFTC’s ban on off-exchange options.”

The filing forced Intrade to stop doing business within the USA. Since the US was their largest market, Intrade soon suspended all trading citing possible "financial irregularities" and effectively closed down the business.

At that time Bitcoin was almost 4 years old, so it did not take long before developers in the bitcoin community to realize that a decentralized version of Intrade, using the digital currency, would be able to withstand far more government intervention. There have been a few attempts to recreate the platform using bitcoin, including the most popular prediction market website today, Predictious.

Launched in July of 2013, Predictious offers most of the features users found on Intrade, including its stock market-like securities exchange, which may one day prove to be problematic, as it did for Intrade.

Seeing enormous potential for prediction markets, Yale statistician Paul Sztorc, who specializes in the art of statistical inference, started coding Truthcoin in December 2013. Sztorc claims to have a life-long interest in prediction markets, and he says that he wrote the Truthcoin protocol because it is an “ambitious project to create a trustless P2P prediction-marketplace.”

While the name Truthcoin sounds like an alternative digital currency, it uses bitcoin as a currency,  and in the original prototype of Truthcoin, uses the bitcoin blockchain to store data.

“Unlike most marketplaces, the end product of a prediction market (PM) is information. Bitcoin adds the second piece of the puzzle: the exchange of value.”
— – Sztorc

Providing more than just future predictions, Truthcoin-based prediction markets can potentially give us better data than volunteers can, on alternatives like Wikipedia. A high quality, accurate set of facts, all in one massive data set. The platform uses a concept known as "the wisdom of the crowd" to find the most likely outcome of most situations, people can use Bitcoin to wager on the outcome of every conceivable question or event.

At its most basic level, Truthcoin can be described as a way for us to discover, with very high accuracy, what events will occur in the future, or even assess the likelihood of what has happened in the past.

One extremely useful offshoot of Truthcoin-derived prediction markets is that the body of decisions can act as an excellent Oracle service for various bitcoin wallets and other programs.

Oracles are simply third party services and servers that tell your program when certain conditions are met. For instance, if you have a multi-signature wallet and you want the third key to be used only if Apple’s stock is above $1,000 a share, or if Hillary Clinton is the president, then you don’t need to trust a person to check those facts for you when you use an oracle.

Having a Truthcoin-based prediction market is not only a way to decentralize the oracle service, removing all need for trust from any centralized service, but it also gives access to a wide array of conditions and topics for that oracle to use.

Truthcoin is more than a program, however. In much the same way Bitcoin is a protocol for many different types of bitcoin programs to run on top of, Truthcoin is a protocol for many different types of prediction markets to build up from. The most advanced Truthcoin-based project known is the still-incomplete Augur, which is a beautifully implemented version that uses Etherium’s blockchain instead of Bitcoin’s blockchain for data storage.

“Your understanding of ‘truth’ will never be the same.”
— – Augur

Augur proposes a 50-50 split of the fees from each contract between the market maker and the judges, and they intend to launch on Etherium’s Mist browser in November of this year. The benefit of using Mist, and not a run of the mill website, is simply to ensure that it stays decentralized.

Not only do prediction markets hope to create a whole new information market that we will find more accurate and truthful than the information we have access to today; it will also provide jobs for anyone who wants them, worldwide, depending only on the popularity of that marketplace.

When completed, anyone who downloads the software client to gain access to the market can immediately sign up as a market maker or a judge, and start trading or working towards earning a living. Since the outcomes of all contracts are decided by a panel of judges who earn more for better reputations, being paid more for higher accuracy, there will be a constant need for judges in the system, all of whom will earn a part of the trading fees – such as 50% split proposed by Augur.

The main factor holding back the mainstream adoption of prediction markets is their currently restricted level of usefulness. Predictuous is a great place to make a bet, but they are not well known, don’t have many bets online, nor a Wikipedia-like interface to display all the knowledge they gather. Researchers looking up information online today are not very likely to go there first for answers.

However, this is precisely why Truthcoin was made; to serve up data that everyone can access. Bitcoin Angel Investor Roger Ver states, "I think Truthcoin may be the most important invention since Bitcoin. (If they can get it to work)"

A good example of what it could be is highlighted by the ever-controversial subject of climate change. The amount of misinformation about climate change online, generated by both sides of the argument, far outweighs any expert opinion. The resulting confusion is enough to turn away people who are genuinely interested in researching the subject.

Wading into such a deep sea of half-truths and outright lies with so few trustworthy sources to help make sense of it doesn’t work for finding real answers. With a Truthcoin-based market, however, you would be able to look up specific questions and find the qualified, incentivized truth on the matter. Not an opinion from a single expert, but finding an accurate answer based on the wisdom of the crowd.