I haven't really thought that much about whether this kind of thing should evolve into the main chain or fork a new one. There seem to be advantages to both. But I don't think there will be a lot of overhead or spam. What I described are just transactions, like any other transaction in Bitcoin. The text of the bet itself doesn't have to be in the blockchain, just the bet's unique id, and a signature to ensure the text can't be changed later. Once it's in the block chain, everybody can be sure they're betting on the same thing by just referencing the bet id.

The bet wagers themselves are also just regular transaction type entries. Making a 10 btc wager is no different than transfering 10 btc to someone. It's no more or less spam.

Thanks! I started reading Strogatz's book again. I wouldn't be surprised if his work on this stuff could be used in a really cool way:

http://epubs.siam.org/siap/resource/1/smjmap/v50/i6/p1645_s1?isAuthorized=no

Now that I think about it, I don't see how it could be implemented with just cryptography. But with Bitcoin, it's easy. Just use future transactions, which will be entered immediately into the block chain, but won't actually take effect until a given block number. You do a transaction that empties out your private account into the joint account, in a block that will be computed 30 days from now. Then, each day you're around, you just transfer your bitcoins into a new private account, and that future transaction will fail because the originating account will be empty. You also set up another future transaction to transfer money from your new private account into the shared account in another 30 days. There are probably ways to streamline this, but I don't see any theoretical difficulties.

Amazingly, it looks like this feature is already baked into Bitcoin:

http://forum.bitcoin.org/index.php?topic=8821.0

grondilu, I remember reading all about that stuff in this book:

http://www.amazon.com/Sync-Order-Emerges-Universe-Nature/dp/0786887214/ref=sr_1_1?ie=UTF8&qid=1306525959&sr=8-1

You didn't happen to sell a pizza in an earlier life, did you?

I'm not sure if this applies, but in nature, timestamping is distributed. That's how your heart works, for instance -- no one cell sets the pulse. Crickets do the same thing.

This is actually a very interesting question, because the two problems we want to solve are adversarial. If only one person knows the password (you), you could forget it, or something could happen to you and your money would be lost forever. If many people know the password, there's less of a chance it will get lost, but more of a chance someone else will steal the money, or get hacked. Secret sharing is cool, but it's really just a way to tweak the tradeoffs.

Here's another idea, a time lock. You could decide that for a period of 30 days, nobody has access but you. But if for some reason, you're unable to access the encryption for 30 days, either because you're injured, kidnapped, or forgot the password, then the shared secret password would go into effect and the second group would be able to access the funds. Of course there are all kinds of ways to game this, but it's an old stand by in meatspace security, and it should be a useful tool for the paranoid.

Thanks for the kind words

It's true that mediators would only be needed if a problem arises, and I'm sure this would be a workable system, but these mediators could become big targets. The more they're trusted by everyone, the more they become a big bull's eye for the government, because they're both widely known and relatively important elements in the system. Of course they will keep their real identity hidden, but as I mentioned before, all you need is one tiny thread to connect their real identity to the cloaked identity. That's why distributing these crucial roles among all the players is so important. Also, the outcome isn't always clear. You'd think it would be pretty obvious to everyone who won the US presidential election the day after the polls close. But what would happen on a bet on Bush/Kerry?

The point about the arbitrage is really important. In an unregulated market, I see arbitrage artists and speculators fulfilling a crucial role in bridging all the different prediction markets together into a coherent picture of the world that reflects meatspace stuff as well. In fact, this stuff would be a lot harder to design without speculators.

Yeah, I think there will be lots of cool bitcoin clients in the future. Bitcoin is only a protocol after all. But I see prediction markets as a generalization of stock markets, currency exchanges, sports betting, futures markets, and possibly even insurance policies and bounty schemes. So all you really need is well designed prediction market support in the core bitcoin protocol. The market will then come up with the actual prediction contracts.

I just want to point out that in many cases, the risk of losing the passwords/private keys, or screwing up one of the many steps, is orders of magnitude greater than some smart bitcoin trojan keylogger being on your linux box. Losing the password is a very real risk.

Hi dacoinminster, thanks for weighing in. Some notes, below:

1) Bets can be machine readable, but this is a problematic single point of failure, especially if a miner is closing out a huge bet. The website in question could easily be down, or it could be hacked, possibly in anticipation of the bet closing. Still, that's a cool idea.

2) Yep, I read up on that thread, but it requires trusted mediators.

3) I'd like to focus on this. The major idea I wanted to test here is that for prediction markets, mediators or referees are never needed. The problem with (1) and (2) is they introduce weaknesses that Bitcoin doesn't have, and it's precisely Bitcoin's resistance to those weaknesses that make it so great. What I'd like to see is a prediction market that is as strong as Bitcoin itself, thereby expanding the Bitcoin economy from just currency and payment to pretty much of all of finance.

4) As an example of how powerful this is, if we can do a prediction market for BTC/USD with just a next generation bitcoin client, it will be as hard to shut down that market as it is to shut down bitcoin itself. Of course if you're betting on USD going up in value, you won't gain possession of any actual dollars. But that's ok, because determining the exchange rate is the hard part, the part that requires mass coordination of the market. Once we've done that, I can just meet up with some guys at a hackerspace and swap USD cash for bitbills or bitcoins. Or I could do a small bank transfer with someone on #bitcoin-otc. The exchange rate will already be set by the prediction market, and both sides can use it to hedge the exchange if they want to. It will never really be possible to shut down this kind of micro exchange between individuals, there's nobody important to go after, and no great risk if you're caught. The safest, most robust interface between meatspace and the Bitcoin economy is masses of individual people, doing small deals across the boundaries. The heavy lifting gets done either entirely in the Bitcoin economy (btc transfers, prediction markets) or entirely in meatspace (car manufacturing).

5) If this does take off, Government will be so severely crippled by the loss of finance, and finance itself will be so utterly transformed, that the meatspace side will start changing fast, too.

Yeah, I'm really not at the stage where I'm suggesting adding anything to bitcoin yet. I'm just trying to feel out the concept and see what the weaknesses are. It wouldn't bother me too much to have a separate block chain for this, maybe with modifications, à la namecoin.

I do think the idea that you might not need a referee for bets is somewhat novel, so I'd love to see some discussion on that.

To me, the most important part of this kind of betting is that it would be as immune to government crackdown as bitcoin. As soon as there's a centralized referee, it becomes a lot easier to go after that entity. And the more the entity hides its identity, the harder the trust issues become.

So the question I was posing is whether it's possible to have a betting market that doesn't require any more centralization than bitcoin itself, and whether my analysis has big problems that I'm not identifying.

From what I understand, Intrade and Betfair determine the outcome of the event themselves and then settle the amounts. Does your version require an outside observer to determine the event outcome?

Betcoin

Betting, or prediction markets could be a central building block in the bitcoin economy. These markets can essentially assume the major functions of currency exchanges, stock markets, and insurance policies and provide invaluable prediction information. In fact, it’s hard to overestimate the power of unregulated prediction markets. If this proposal pans out, they could be implemented entirely within the bitcoin framework, and thus will inherit all of bitcoin’s distributed goodness.

The central insight here is that these prediction markets do not require a centralized referee at all, and therefore can be settled automatically by miners. The outline below borrows a lot of ideas from Intrade. It applies to a binary event outcome, so it’s not directly applicable to currency exchanges and the like, but if the basic idea is valid, it could probably be extended to more open ended bets pretty easily, as long as the value at risk can be bounded.

How it could work:

1. Someone creates a bet on a distributed betting board. The bet is made up of a unique bet id, a human-language description of the bet, a description of which circumstances will lead to a true or false outcome, and an expiration date. The expiration date can occur before the outcome happens. The bet is authenticated and entered into the block chain by a miner.

2. Once the bet is created, trade commences. A party can put in either a bid or an offer on a distributed board. Parties use the board to connect to counter-parties and transact a trade. Short selling is an integral part of the system, but is fully covered by an escrow payment.

3. If Alice and Bob agree on a trade of x shares at price y btc, they submit a secure trade agreement to the betcoin network. The price of a share can range between 0 and 10 (representing the probability that the event will occur as described). A miner authenticates the trade and adds it to the block chain. This includes a bitcoin transfer from each party to a special escrow account, which will cover any possible losses. This amount is between 0 and 10 btc per bet share. If either party does not have enough bitcoins to cover the escrow, the trade is invalid and does not enter the block chain.

4. Trade continues as usual until the expiration date. At this point, the bet is closed. The miner closes out all bets as follows: A closing price is determined by checking the last traded price in the block chain. Trades entered after the expiration date are invalid and do not enter the block chain. Bitcoins are transferred to all parties from the escrow account, awarding them the closing price of the bet, multiplied by the number of shares they’ve purchased. Parties also recieve their residual escrow funds back, minus the closing price multiplied by the number of shares they’ve sold.

5. If the event outcome has been determined in the real world, the bet price should reflect the outcome very closely and should be near 0.0 or 10.0. The bet can therefore be considered successfully closed.

6. If the event outcome has not been determined, the bet price should be very close to the concensus probability that it will happen. Trade can continue on a parallel bet that is either identical, or very similar to the original bet, and has an expiration date in the future. Speculation will ease the transition between bet series.

I haven’t seen this idea described this way before, so i’d love to get feedback on any glaring flaws I haven’t thought of. Assuming it holds water, I’m very interested about how much of it can be implemented in the current bitcoin design itself. Obviously this is a first, naive sketch and there’s plenty of room for improvement.

Also, there's no reason transaction times and costs would be cut only for transactions within the bank. Established banks will trust each other and do transactions with each other without having to trust the individual depositors (possibly even on a ripple network). Other huge advantages to banks like these are securing the bitcoins themselves, offering insurance in case of lost bitcoins due to a flaw in the backup regime, or a virus, and implementing access control to different wallets, which would be useful in a large company.

The beautiful thing is that none of these are particularly expensive. If backup and security is done right, the insurance costs should be very low. Everything else is pretty simple, with low barrier to entry. It's just not the kind of stuff each individual bitcoin owner should have to do.

They're secure for trading insofar as you trust the holograms, so they're probably at least as secure as regular fiat cash.

Heh, I've been meaning to read that

I think this is great, but I'm a little skeptical of success. I think it's more of a political question than a legal question, and I think eventually the USGOV will want to shut bitcoin exchanges down, and will easily be able to bend the law to their will. A more promising avenue (which of course can and should be done in parallel) would be work on p2p exchanges. I'm not sure if there's another thread open for this, but the key might be to separate fund holding for transaction management. In other words, the exchanges won't hold anybody's money, they'll just record valid transactions. If any of them get shut down, no money is lost. Fund holding can also be done p2p, and seems like a completely separate problem, with different requirements.

Rash Gash Guitars in Israel is now accepting Bitcoins for all products for sale. Currently we're not posting BTC prices, but we will if there's enough demand. We might also sell BTC in the store for cash, which should be of interest to any Israelis out there, even if you're not guitar players.

Hey Martin,

I tried accessing http://nosoperor-internal.appspot.com/market_data?fetch_all=true, but I only got data from 17 April. Do you have earlier data available?

Thanks!