BTC400 pledged to develop USD/BTC rate prediction market

[rpietila]

Hello all,

We have the following service in development. I post here in order to integrate our efforts with the wishes of the community.

<spex>
The essence of the prediction market is to offer contracts expiring every Friday, for predicting the USD/BTC exchange rate (volume-weighted average) on that day. The outcomes are in $1 granularity, ie. you may select a slot $43-$43.9999, and no matter what the exchange rate is, as long as it is $43.xxxx, you win. Otherwise, you lose.

We intend to offer the betting of a single slot, for up to 100x payout. We intend to offer a range contract for several adjacent slots, such as $40-$44.9999. We intend to offer binary calls and puts. Binary means that if you are right, you win the specified amount, regardless of "how right" you were. Our system enables also conventional calls and puts, which pay out more if you are more in the money.

The UI would be running on a webserver. Upon arrival to our website, you are generated a URL-based user account with a deposit address, credit balance and referral code. You are also prompted for a dead-man-switch address that will receive all the BTC in this account after a 2-month period of inactivity in the account. (It is of course possible to withdraw manually also.)

We will offer a large variety of contracts for each maturity, up to 3 months into the future. You can view and bet on the contracts easily, internally in our website. You will know the odds beforehand. You will be able to both buy and sell contracts. If you sell something you haven't previously bought, you are essentially writing the contract. In this case you deposit the maximum payout upon writing, and are therefore never liable to pay more. We also don't run a risk of our customers defaulting.

We have a proprietary software for setting the odds, and as long as we are teaching it how to work properly, you will only be able to bet BTC10 at any one time. There is no total maximum, however, but the software will adjust the prices of the contracts based on the volume and direction of bets. We will raise the maximum one-time bet limit as soon as we are comfortable, and aim to offer BTC100 as soon as possible.
</spex>

To add credibility to the people behind this idea, I claim that I am the Chairman of a reputable financial institution and prove it here:
https://www.silverbank.net/index.php/en/meista

The syndicate behind this idea has raised BTC400 initial funding for concept and software development, and is willing to commit more if needed. If you know how we should proceed with this, please contribute here, or join the team. I will tip at my discretion the valuable advice you give in this thread, so please include your BTC address. If you are interested in joining as a programmer, service operator, marketing specialist, or financier, please contribute something here first, and then PM me. As for financiers, we have both stocks and bonds to offer. If you are familiar with MPEx, you know what I mean. Stocks get the net profits, bonds are limited-duration commitments to make good on the losses that the company makes.

[rpietila]

[rpietila]

What we are willing to source rather soon, is the web-frontend (punter/bettor/investor interface).

The other components are possible to be developed in-house. However in case you have expertise on something required, or know about components of code that might be useful, please contact us.

This venture is a highly liquid no-nonsense experiment of setting up a bitcoin business. We expect that you are a top developer if you contact us, and we are ready to pay for it.

[Uglux]

So you are planning to offer some kind of Futures/Options, or at least something, that MPEx is already offering with an (idiot exclusion?) entering fee, if I understand you correctly. (MPEx PR is probably loading the shitstorm canon atm).
Don't get me wrong. You can do/try what ever you think is right. But you are entering a field with a lot of competition from other casinos, that already inflate the area of unproductive businesses.

Nonetheless, if you want to offer your service to the rest of the "members only" userbase of current services, you should get rid off accounts completely, including URL-based user accounts. I think it was the key for the success of satoshi dice, since any idiot, who can use bitcoin, can automatically gamble at SD. They don't even need an URL-based-anything to operate. (MPEx developed this advantage also lately, IIRC). But if your webserver is fucked, you are fucked.

[Sukrim]

An maybe easier option would be to just offer parimutel betting on BTCUSD price slots.

Predicting the future in a market that acts highly irrational from time to time, consists of only a single main player (MtGox) which has failed/been hacked several times in the past and still breaks under high load recently means you either have to keep a high house edge or risk a lot.

I agree that something like "no accounts required to bet" would probably be one of the main reasons for people to use your platform.

[rpietila]

So you are planning to offer some kind of Futures/Options, or at least something, that MPEx is already offering with an (idiot exclusion?) entering fee, if I understand you correctly. (MPEx PR is probably loading the shitstorm canon atm).
Don't get me wrong. You can do/try what ever you think is right. But you are entering a field with a lot of competition from other casinos, that already inflate the area of unproductive businesses.

Nonetheless, if you want to offer your service to the rest of the "members only" userbase of current services, you should get rid off accounts completely, including URL-based user accounts. I think it was the key for the success of satoshi dice, since any idiot, who can use bitcoin, can automatically gamble at SD. They don't even need an URL-based-anything to operate. (MPEx developed this advantage also lately, IIRC). But if your webserver is fucked, you are fucked.

Thank you for the kind advice. We are aware of that competition is fierce. It seems that it does not take much to open this kind of service, and unfortunately some financial services, most notably bitcoinica, have fallen because of a hack.

I have yet to encounter MPOE-PR personally, and (s)he is welcome to state his/her opinion on the venture in this thread.

Getting rid of accounts completely was our first idea, and we have its technical spex half done. We abandoned it in favor of a webserver, because we intend to gain trust and volume with a lot of small bettors before entering in the big boyz arena and eating MPEx for lunch. Satoshi Dice is a nice enterprise, but we are envisioning the age when bitcoin users are numbered in millions, and they will prefer "soft" methods over "verified & trustable". I have nothing against the verifiably fair concept, but the number of people who actually make or break about it... is not much.

What we believe we can do better, is:
- General trustability of the company is better than most other bitcoin ventures as this is backed by businessmen with long track record outside bitcoin. The company actually has more people behind it than just one!
- For the reason described above, the company is well funded and can quickly (as soon as our risk-management software is honed) accept rather high bets against the house.
- We believe that it is our greatest advantage that we can be open at all times and the ability for a user to buy/sell an option is not constrained by lack of liquidity. This is the reason why we are going the marketmaker way. Our software quite diligently evaluates our risk position for every possible outcome and adjusts the odds accordingly.
- Of course the above would be moot if the spread was sky-high. We intend to push it as low as possible, and give you the best of both worlds - the liquidity of a market-maker but also the low spreads possible in a parimutuel or similar approach.
- "Predicting the future" is something we want to reserve for our customers. Our intention is to minimize our own risk, and turn out a small profit on most of the rounds.
- Nice and functional web interface, that is immediately usable, and features an auto-forward option (all credits are paid directly to your own bitcoin address).

[rpietila]

I forgot to mention our most obvious advantage over some of the other exchanges out there:

- Here you know what your odds are when you enter/exit into contract. I honestly don't understand the approach why you should not know it beforehand.

Also as our pricing engine updates the odds offered every minute, it generates a lot of data that you can analyze for optimal trading strategies. This is not suitable for HF-trading, since there will be a forced (albeit small) spread. But for every other legitimate business we consider this is to be the most reliable, easiest to use, cheapest and most fun way to speculate on bitcoin price, or do some hedging.

[rpietila]

And still one advantage of ours:

- No dealing with any fiat currency. Much more solid and robust operation, far less technical, legal etc. hassles.

[Uglux]

- Here you know what your odds are when you enter/exit into contract. I honestly don't understand the approach why you should not know it beforehand.

You even try to make a "weather forecast" of USD/BTC rate, based on what? All your odds can only be "wild guesses", at best, because it is (still?) possible to manipulate the exchange rate. You know, the fiat printing game aka "the soft method". But if you don't prefer "verified & trustable" ...

And still one advantage of ours:

- No dealing with any fiat currency. Much more solid and robust operation, far less technical, legal etc. hassles.

The USD/BTC exchange rate is pretty much a "dealing with fiat currency" thing. And you should ask the GLBSE (or Gigamining?) operators about legal hassle. MPEx and SD have their means, to avoid uncle gov to a certain degree, but your operation seems to be open for a lot of attacks, which is not "Our intention is to minimize our own risk".

[rpietila]

Thank you for comments. I try to answer your concerns:

- Here you know what your odds are when you enter/exit into contract. I honestly don't understand the approach why you should not know it beforehand.

You even try to make a "weather forecast" of USD/BTC rate, based on what? All your odds can only be "wild guesses", at best, because it is (still?) possible to manipulate the exchange rate. You know, the fiat printing game aka "the soft method". But if you don't prefer "verified & trustable" ...

Our exact method for setting the odds remains proprietary, but the basics are open to be discussed:

The 'outcome space' is divided into $1 slots. For each slot we integrate the probability of the price ending up in this slot, from the sum of two probability density functions (cauchy distribution with parameters ExpectedPrice, ExpectedVolatility and exponential distribution with ExpectedPrice). The weight of the exponential function decreases when the maturity approaches. We use the existing Mt.Gox data to evaluate the parameter ExpectedVolatility. The ExpectedPrice is trickier to evaluate, but we will use an automanual approach to what other futures exchanges give, what we believe (so far USD/BTC has gone up almost 100,000% so there will definitely be a huge bias to the upside) and how the punters are betting.

This gives us a 'raw' probability for each slot. It will be adjusted by the amount each slot has been over/underbet relative to others. If everybody is all bulls, the cost of longs will go up and vice versa. We only allow a single bet of BTC100 to make it possible for us to change the odds for the next bettor. By this method of operation, we can fully take into advantage of our own bet feed as a parameter in setting the prices, yet we avoid the liquidity trap of some p2p exchanges and the rather high spreads that MPEx has.

A binary options contract consists of betting a single or multiple slots. A simple example is next Friday binary call at $50. If the price is more than $50, you win. Otherwise you lose. The odds are evaluated by summing up all the slots from $50 upwards and adding a house margin for purchase (subtracting the margin for sale). It happens that binary put $50 is exactly the same contract as (short)selling the call. We have measures in place to automatically wider spreads in extreme trading conditions such as the loss of Mt.Gox api feed, volatility of spot rate, influx of bets or DDoS.

I believe you have little need to worry about our trading/outcome risk management. We have every intention to keep the payout matrix as even as possible (so that there will be only a few outcomes that would lead to us losing money weekly, and even then the amount is manageable). We start with offering rather low maximum bets (BTC10) and only go higher as we have experience on the setting of the parameters. The team is well capitalized and we are working on to install an insurance bonds system similar to MPEx, which would further add trust to our ability to pay our obligations. We can also give out the payment matrix if we like. It shows exactly how much we need to pay out in every possible outcome.

If, however, you believe you can add some insight to our risk management, please go on. We have BTC360.5 left in our current software development war chest and are more than happy to share it with everyone with valuable contribution.

And still one advantage of ours:

- No dealing with any fiat currency. Much more solid and robust operation, far less technical, legal etc. hassles.

The USD/BTC exchange rate is pretty much a "dealing with fiat currency" thing. And you should ask the GLBSE (or Gigamining?) operators about legal hassle. MPEx and SD have their means, to avoid uncle gov to a certain degree, but your operation seems to be open for a lot of attacks, which is not "Our intention is to minimize our own risk".

No, it is not. It is just the thing that we offer people to bet for. And I would be delighted to know what exactly makes us any more vulnerable to angry gov that MPEx and SD are.

[MPOE-PR]

One point of interest would be to know if you have any comments re this discussion.

[rpietila]

LOL, I am commenting in the thread with my own name. Read that first. Sad if you cannot read it, it seems Finnish is more difficult to understand than Romanian, which is pretty easy for anyone with a basic command of Italian.

[killerstorm]

Have you thought about using an "escrow"?

Please check this: http://www.reddit.com/r/Bitcoin/comments/1a6ewu/ive_been_waiting_for_a_usable_blockchain_escrow/c8ui49g

And this: https://bitcointalk.org/index.php?topic=141536.msg1507614#msg1507614

[Sukrim]

Something like using smart contracts (https://en.bitcoin.it/wiki/Contracts) might be a really interesting way of doing business, on the other hand it might be too much for the average user. Also it might likely require a specialized client.
On the other hand this offers a good chance to build a better brand, if you have to load your "trading wallet" first. The upside for you and the users would be that you actually never have to keep bitcoins that aren't in use and users always have control over their keys.

[killerstorm]

Something like using smart contracts (https://en.bitcoin.it/wiki/Contracts) might be a really interesting way of doing business, on the other hand it might be too much for the average user. Also it might likely require a specialized client.
On the other hand this offers a good chance to build a better brand, if you have to load your "trading wallet" first. The upside for you and the users would be that you actually never have to keep bitcoins that aren't in use and users always have control over their keys.

Perhaps the easiest way to do it is blockchain.info-style web wallet provided by service... It doesn't make it any more complex for users, basically for them it looks like a page which shows how much money they have on account and which allows deposits/withdrawals. But it won't allow service to run away with the money.

Arbitrage between futures price and spot price is basically free money, but it isn't really risk-free when you use a third-party service. I think that's why futures prices on icbit.se differ so much from spot prices. Use of escrow removes a decent amount of risk. (Well, depending on how it is implemented... Quite likely it won't be perfect...) So this can encourage arbitrages to trade more, which is a good thing.

[rpietila]

Thank you guys,

We have been thinking about the confidence of our customers that their coins are safe and cannot be hacked or stolen by the operators. The track record of the other similar services is just so awful that discussing this matter in the open is the prudent thing to do.

However, the actual implementation is not so easy yet. Our own expertise is from the finance, not from bitcoin technology. I don't say that it would be difficult for us to implement just about anything we want, but we want to not compromise the casual user's ease of placing bets. Our spex says that the site needs to be usable in 3 seconds after clicking the link, and in 3 minutes the joe6pack would have been able to figure out how to fund the account, to have done it, figure out how to bet, and to to have done that. Complicated technical solutions must be implemented without any extra effort from the user's side.

In the beginning we wanted to use the blockchain for registering bets, but needed to scrap the idea for 3 reasons:
- Blockchain bloat and sharply increasing tx fees
- We want to appeal to more people than the number of current bitcoin users, so it must look good and be easy to use
- Compromising the payouts for users using shared wallets (educating an increasing number of less technical users does not work)

If there is a fair implementation for blockchain escrow, we would jump on it, to offer it for our advanced users, who use the service for hedging and seldom do anything but the maximum (BTC100) one time transaction, and whose position may rise to 1000s. It is unlikely that a casual bettor would profit from this, except if it does not cause any extra hassle whatsoever.

Our current risk management approach leans on the following pillars:
- Strict maximum one-time bet of BTC100
- Our trading engine adapts to bets and changes the rates according to bets placed so far
- Widening spread in times of high volatility
- Possibility to hedge with other exchanges (unlikely to work in practice, as with all probability they have the same skew in their orderbook as we do)
- Underwriting system, where the total orderbook risk is insured with bondholders as in MPEx or underwriters as in Lloyds (or both). We consider that the prudent way is to insure all risk beforehand. We would never sell a contract that, if winning, would lead to insolvency. We have sufficient BTC to ensure this, our first worry is rather to grow a healthy userbase soon enough to capitalize on the opportunity. We believe that it anyway takes some time for the big money to find a new service because of trust issues, and accept it. The first months are needed for our odds-calculating software to adapt to the market conditions, and we don't even want to have too high volume when our system could still be exploited by a nimble trader or ruthless manipulator.

Please elaborate further, how this could be done. We have no need for the coins before the maturity, so if there is no risk to us, or hassle to the user, we certainly want to give it a shot.

[Sukrim]

https://en.bitcoin.it/wiki/Contracts#Example_4:_Using_external_state kinda covers your usage scenario. As killerstorm said, you'd have something like the blockchain.info client with a single "trading" address that you have to fund but that can be saved locally, not on your servers.

Then the client creates a bet by sending some amount (of up to 100 BTC) to you or to itself on a certain date and time, depending on the oracle that you control. The oracle would simply return the current BTCUSD rate, something that's easily verifiable to work correctly. You then also release a transaction that either gives the person betting the money or takes it back, also depending on the oracle (thinking of it, the oracle could even be supplied by a third party, like MtGox. I'm not 100% sure if it can be open source (show both outcomes) though, gotta read the stuff again).
The user then can be sure that you have the funds to cover his bet and you can be sure to get the money. It might also allow for even more flexibility, as you can dynamically set the time when the oracle shall be asked.

[killerstorm]

Please elaborate further, how this could be done. We have no need for the coins before the maturity, so if there is no risk to us, or hassle to the user, we certainly want to give it a shot.

The basic idea is that funds are blocked in such a way so both service's and user's signatures are require, i.e. neither service nor user can move money on his own.

There is a risk that user won't unblock funds when he should.

Normally this isn't a problem as you can give user an incentive to unblock funds. For example, user deposits 110 BTC, puts 100 BTC into a bet, loses it. He still has 10 BTC on account, and he needs to unblock whole sum to get it.

However, there can be a problem with users who are stupid assholes, are dead or want to ruin service financially at their own expense.

I don't know how likely are these scenarios, but it's possible to try to fix it using a more advanced scheme, say, 2-of-3 signature: some trusted 3rd party can unblock funds when user isn't cooperating.

As for the tech side, in the most minimal way you can generate a private key from a user's password in browser and use it to sign multi-sign transaction. It is relatively easy to implement.

People did something like this via command-line interface... However, as far as I know, currently it isn't used in any of user-facing apps. blockchain.info has a page about escrow, but it isn't present in wallet.

[rpietila]

Sorry I have been slow to respond. A kind of apology follows:

MPOE-PR has been harassing me, and I was featured in MPEx owner blog:
http://polimedia.us/trilema/2013/strategic-superiority-the-saga-continues/

(I think the main point of his/her foaming is to make noise, which is a strategy I also employed with some of my businesses in 2011, which actually turned out not to be so useful, but fools must repeat other fools' mistakes. I hope his comment about MPOE-PR clones did not mean that he will unleash more in this forum. The ignore button of the current one is orange enough..)

Also after I suspended the investment gold sales in one of my businesses yesterday (Melkisedek Oy, incorporated in Finland 2003), http://hopea.fi/, in 3 hours the leading Finnish newspaper Helsingin Sanomat had interviewed me and put forth the following article: http://www.hs.fi/talous/Kullanmyyj%C3%A4+j%C3%A4%C3%A4dytti+sijoituskullan+myynnin+Kyproksen+pankkikriisin+takia/a1363789689013, English translation: https://bitcointalk.org/index.php?topic=153959.100 (post #120) . Last night it was among 3 or 4 most accessed articles in their website.

As if that wasn't enough, I got a call from the Finnish Police, concerning my alpha offer of options back in... March 3-8, with the total wagers of about BTC7. The friendly message was that we will not investigate the possible breach of Finnish law with this issue further, if you in turn take care to read what the law says before expanding operations. Well, in no way I have even dreamed of operating this business in my name in Finland, so we kind of agree on this one.

By the way, what could be a suitable jurisdiction under which to operate? If we don't find one, somebody will just steal the idea and operate it anonymously. Our way of doing things is to post most of the plans publicly online anyway, and anyone with reasonable skill and capitalization can pick it up if we fail to do it because of legal challenges. In this case we would do all the work and get no pay 

[aan]

Please elaborate further, how this could be done. We have no need for the coins before the maturity, so if there is no risk to us, or hassle to the user, we certainly want to give it a shot.

The basic idea is that funds are blocked in such a way so both service's and user's signatures are require, i.e. neither service nor user can move money on his own.

There is a risk that user won't unblock funds when he should.

Normally this isn't a problem as you can give user an incentive to unblock funds. For example, user deposits 110 BTC, puts 100 BTC into a bet, loses it. He still has 10 BTC on account, and he needs to unblock whole sum to get it.

However, there can be a problem with users who are stupid assholes, are dead or want to ruin service financially at their own expense.

I don't know how likely are these scenarios, but it's possible to try to fix it using a more advanced scheme, say, 2-of-3 signature: some trusted 3rd party can unblock funds when user isn't cooperating.

As for the tech side, in the most minimal way you can generate a private key from a user's password in browser and use it to sign multi-sign transaction. It is relatively easy to implement.

People did something like this via command-line interface... However, as far as I know, currently it isn't used in any of user-facing apps. blockchain.info has a page about escrow, but it isn't present in wallet.

In general, what you said sounds like a good way to do all kinds of betting services. People not releasing their funds, or not releasing them in a timely fashion, would be just contained in the rules of the game. Some people will probably not release their money even if they get something in return, but that could just be subtracted from the winners amounts.  And in many cases the service provider would be position-neutral, and the site could be run with zero capital. I wonder why this kind of thing doesn't seem to be standard by now.

Even without the use of a mediator this kind of system seems quite good to me. The risk the user of a site like this takes would be that he wouldn't get any of his winnings, but would get his own money back. In an extreme case the operator of the site could refuse to release anybodies money, but he wouldn't get it either. The whole site could also be shut down by the authorities, with the same result.