Prediction Markets In A Nutshell:Prediction markets are a way to bet on future events. The way prediction markets operate today resemble gambling rather than investing. There is no underlying asset to extract value from after the bet has been settled. The main vulnerability of prediction markets is the need for a trusted third party to settle the bet. While one could try to decentralize the platform that is used for bets, the way the outcome of the event is decided is still a point of failure in the system.
The solution to the problems mentioned above is to turn future events into digital commodities.
To understand how to do so in full, please read the following
https://medium.com/@keyuno/constructing-universal-map-of-knowledge-7fcd03a084d9. In short, by utilizing bitcoin blockchain it is now possible to commodify and interlink any event imaginable, including future events. The platform that used to commodify the events is counterparty. Counterparty resides on top of bitcoin, which means that all digital assets that are created via counterparty gain the security of the bitcoin network.
Counterparty contributes to the bitcoin ecosystem by creating an additional use case – each counterparty transaction has to include a btc fee.
Future Events As Digital Commodities:By following the instructions specified in the 'constructing universal map of knowledge' article (linked above), one can become an owner of a future event asset. Because future events are treated as digital commodities, price discovery mechanism becomes one of the tools used to predict the outcome of an particular event. The greater market value an asset that anchors a version of a future event has, the greater probability that the event it anchors will occur in the future.
One of the major features of the counterparty protocol is a decentralized exchange. The decentralized exchange removes the need to trust a third party to facilitate the trading of future event assets. The assets are always under the control of the traders, and the transactions are secured by bitcoin network.
Unlike traditional prediction markets, asset based prediction markets are not a zero sum game. Events that did not occur in 'consensus reality' could still have value as being part of an alternative timeline. Fictional/simulated timelines and the events that happen in them can be registered as independent events and be a part of a larger construct.
Value:The value of event assets is largely based on the fact that they are highly resistant to forgery.
In general, the invention of bitcoin technology is the invention of digital scarcity.Bitcoin was created to allow people to send digital information between each other in form of a token (btc). None of the participants can retain a valid copy of a token after the transaction has been made and there is no need to trust a centralized service to validate the transactions.
All the transaction are recorded on a distributed public ledger. The fundamental value of a distributed public ledger is the secure environment it provides that allows people to publish/send certain information without trusting any third party.
Information that has been written into the ledger is automatically timestamped, anyone can view it and nobody can modify it. Centralized services cannot provide ‘objective’ timestamping simply by design, information can be edited by service operators and they are easier to attack.
In order to record the information into the distributed public ledger, a fee is paid to the those who invest resources to secure it (bitcoin miners). The ‘objectivity’ of a distributed public ledger is measured by the amount of resources the attacker has to use in order to undermine its’ integrity.
When counterparty is used to create event assets, the events assets are ‘objectively’ timestpamed and secured by bitcoin network. The timestamping is used to differentiate between particular events. The first to capture the event is the event owner.
Authentication:Today we use physical objects as anchor points to culturally significant events. Physical objects have to be authenticated by experts in order to maintain their relevance and value. One cannot be completely certain that the object itself is authentic because there is a need to trust a third party. The process of authentication without the need to trust any third party is built into the counterparty protocol. That means that digital assets become more concrete representation of events, because they are more easily authenticated than physical objects.
Additionally, culturally significant events that have no physical anchor points can now have digital objects to serve that purpose. It can easily be verified when a particular event was first recorded and there is no need to trust a centralized service to do so.
Connections:The 'constructing universal map of knowledge' article, described how to connect event assets in a two-way link via value communication.
The greater quality connections future event assets have, the greater predictive power they gain. A greater insight could be derived from observing the connections of future events, as future events can be connected by 'if/then' type of branching structure.
Event assets owners have economic incentive to connect their events to future events that they believe have higher probability to occur as it could increase the value of the assets they own. The owners that don't protect the integrity of the information associated to the event assets, including the validity of connections, will risk the decline of monetary value of their assets. This is the main economic incentive that will insure the existence of reliable information, essentially putting an end the 'fake news'/'post truth' era.
Conclusion:Having insight into future events and access to reliable information could improve our decision making ability and benefit humanity as a whole.
