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Author Topic: [WHITEPAPER] Decentralized Bitcoin Prediction Markets  (Read 26024 times)
AsymmetricInformation
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February 19, 2014, 03:24:07 PM
 #1

Hi everyone,

I work for the Yale Economics department (for a FED chairperson, in fact), and they very generously gave me 2 weeks of time off to make a conclusive effort on the project I’ve been working on in my free time for a few months, now. That good news aside, I’m feeling a little burnt out so I’m hoping to get some kind of support from the community or the project will probably stall out at this plateau.

Basically what I’ve done is built an incentive system which allows for the creation of Bitcoin Prediction Markets. As I mention in a first draft of my applications paper, these markets can be used for a number of purposes:

1.   Use the combined knowledge and intellectual ability of mankind to construct and refine the most accurate possible prediction of the future.
2.   End debates about the contentious issues of today, such as climate-change, heritability of IQ, effect of GMOs etc.
3.   Prevent lying from anyone (even politicians, industry leaders) about a target claim.
4.   Encourage and compensate whistleblowers.
5.   Provide ‘market advice’ on the relative impact of decisions on outcomes (“If we adopt X Fed policy, what effect on inflation can we expect?”).
6.   Provide insurance (buying and selling) opportunities for catastrophic global disasters, earthquakes, hurricane, etc.
7.   Allow tradable binary financial derivatives, for example on the BTC exchange rate, or the solvency of exchanges.
8.   Fun recreational gambling in real time, always at actuarially fair odds and low fees.
9.   Allows for the creation of ‘Trustless Dominant Assurance Contracts’ which allow financing of public goods such as lighthouse, roads, etc. with no counterparty risk.

Because the protocol (in theory) forces individuals to vote realistically on after-the-fact measurable outcomes, the protocol also has applications beyond prediction markets (as the Bitcoin blockchain has applications beyond transactions).
Here is the abstract to my paper:

 Abstract. Where Bitcoin allows for the decentralized exchange of value, this paper addresses the decentralized creation and administration of Prediction Markets (PMs). An alternative proof-of-work blockchain collects information on the creation and state of PMs, with the winning state of a market determined by a modified weighted-vote. An incentive mechanism attempts to guarantee a) that all voters vote honestly, and b) that PM-creators act as entrepreneurs, bearing the economic costs and benefits of the PMs they create. Bitcoin users can create PMs on any subject, or trade anonymously within any PM, and all PMs enjoy low fees and infinite market liquidity through a LMSR market maker. Scalability and customizability can be achieved via ‘branching’ (controlled-fork). The paper closes with a discussion of implementation details.

Hopefully there is enough interest to reach out to other collaborators (Bitcoin Foundation, Altcoin developers, etc.)
The entire project can ride on its own blockchain, or possibly even in the OP_RETURNs of the Bitcoin blockchain, no hard fork or any major change required.

I’ve avoided the final puzzle piece, which is how to have the protocol sign withdrawal transactions (for people to move their Bitcoin back into addresses they control). I provided 7 possible approaches, but even that was probably a waste of my time because I’m sure any professional dev would instantly know their favorite approach, and, (moreover) new approaches are constantly invented (example: Etherium was invented after I wrote the paper).
 
Thanks for reading!
-Paul

https://github.com/psztorc/Truthcoin/tree/master/docs

Support Decentralized Bitcoin Prediction Markets: 1M5tVTtynuqiS7Goq8hbh5UBcxLaa5XQb8
https://github.com/psztorc/Truthcoin
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jimhsu
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February 19, 2014, 04:10:11 PM
 #2

Hi; sounds like an interesting project. You may be interested to hear what Counterparty is trying to do (providing trustless, decentralized bets on feeds -- anything from coin prices, to weather conditions, to Super Bowl results.) Funding can also be achieved through issuance of assets, which represent shareholder interest. Alternative approaches are definitely welcome though; so far bitcoin lacks a truly robust derivatives market.

"Trust, but verify."
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AsymmetricInformation
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February 19, 2014, 04:45:36 PM
 #3

Hi thanks for your interest!

I can't seem to find the underlying logic of Counterparty. It seems that anyone can issue any asset they want. While that seems cool, it actually assumes counterparty risk is low, whereas my project assumes that everyone is untrustworthy.

Do you know where I can find a Counterpary whitepaper or code sketch? (other than the Readme which isn't bad).

Edit: I'm glad you mentioned this though as I think my project will rely on the same implementation strategy.

Support Decentralized Bitcoin Prediction Markets: 1M5tVTtynuqiS7Goq8hbh5UBcxLaa5XQb8
https://github.com/psztorc/Truthcoin
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February 19, 2014, 07:15:58 PM
 #4

Sure: https://github.com/PhantomPhreak/Counterparty and https://counterparty.co/wiki/main/

You're also welcome to register on the forums.

Like any other real asset, it is what you do with the asset that matters. There are currently a lot of junk assets left over from the development period on there; however asset issuances now cost a non-trivial amount of money, and recently the asset system has been proposed as a way, for example, for ASICMINER-like projects. The "lack of trust" is reflected not by who is using the system, but the fact that these operations (ordering, exchanging) do not rely on the presence of a middleman or escrow agent.

There is no way to make a fundamentally untrustable system (otherwise, no trades would take place), but there are ways to formally delineate boundaries of trust. As I mentioned in some discussion a while ago, "who do you trust? A stranger? Your exchange? NYSE? CNN? NIST?"


"Trust, but verify."
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February 19, 2014, 09:00:34 PM
 #5

Love the idea -- once I work through the entire whitepaper I'll get back with some feedback.
edmundedgar
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February 20, 2014, 01:19:59 AM
 #6

This is very interesting.

If I'm reading it right, people vote to settle outcomes, under an incentive system where you want to:
1) participate in a lot of votes
2) avoid falling out of line with the consensus
? 3) avoid damaging your reputation ?

It sounds like the incentive will be for everybody to pull data from the same feeds, because that will be the easiest way to stay in line with the consensus. So you end up with whatever the feeds are that everybody coalesces around becoming the de-facto trusted authority that your network relies on.

This may not be a bad thing - presumably that authority will be motivated to stay reliable, and if they suddenly stop providing feeds, the network will be able to switch. But if the feed just provides sub-optimal data, or even starts providing outright lies, how does the scheme incentivize people to get back on the right track? It feels like once we're all pulling from Feed X, anybody who tries to deviate from Feed X is going to get spanked, even if Feed X is now full of shit.

Doing this with consensus witnesses is a hard problem compared to the problem Bitcoin solves because in Bitcoin all the nodes have to do is execute some extremely cheap scripts and timestamp the results, which is so simple and hard to screw up that there's no point in trying to pull that information from a central authority instead. Just run the software as designed and you'll stay in line with the consensus. (Although even there, miners tend to organize into pools and outsource their "voting" to a small number of pool operators...)

Disclosure: I run Reality Keys, which is a centralized authority for certifying facts that among other things can be used in an (otherwise decentralized) prediction market, albeit one that can be combined with other authorities and settlement mechanisms.
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February 20, 2014, 01:30:09 AM
 #7

But if the feed just provides sub-optimal data, or even starts providing outright lies, how does the scheme incentivize people to get back on the right track? It feels like once we're all pulling from Feed X, anybody who tries to deviate from Feed X is going to get spanked, even if Feed X is now full of shit.

I haven't read the whitepaper yet, so I'm pulling this out of my butt, but...what if we made a contract that said, "On February 20th, Feed Y will be more trustworthy than Feed X," where Feed X is the incumbent feed that you feel has been giving bad data?

What if there are 3 feed services and contracts were settled based on the feeds' majority opinion?

What if there were 10 services and contracts are settled on a supermajority of 80% of feeds? Otherwise, if you don't have 80% agreement, then the contract is a draw?

Like I said I haven't thought this through much. Maybe it's best to just dismiss my ideas.
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February 20, 2014, 01:44:21 AM
 #8

But if the feed just provides sub-optimal data, or even starts providing outright lies, how does the scheme incentivize people to get back on the right track? It feels like once we're all pulling from Feed X, anybody who tries to deviate from Feed X is going to get spanked, even if Feed X is now full of shit.

I haven't read the whitepaper yet, so I'm pulling this out of my butt, but...what if we made a contract that said, "On February 20th, Feed Y will be more trustworthy than Feed X," where Feed X is the incumbent feed that you feel has been giving bad data?

What if there are 3 feed services and contracts were settled based on the feeds' majority opinion?

What if there were 10 services and contracts are settled on a supermajority of 80% of feeds? Otherwise, if you don't have 80% agreement, then the contract is a draw?

Like I said I haven't thought this through much. Maybe it's best to just dismiss my ideas.

The feeds aren't actually formally involved in the system as I understand it - they just have participants vote on each thing. What I'm saying is going to happen is that in practice everyone is going to pull their data from some kind of external data feed. Presumably they'll use whatever is simplest and cheapest, then they'll be stuck with that until it completely breaks...

This is actually a problem with a lot of situations where you are punished for getting out of line with the consensus. The market tends to settle on a winner early, usually the one that's easiest to get started with, then has a hard time switching off it, even when everybody can see that there are better options. MS Windows, PHP, the English language, Mt Gox, QWERTY keyboards, cities built on geological faults, etc etc etc. But this is built with a much stronger incentive to stay with the consensus than any of those, and actually deliberately discourages a coordinated attempt to switch to something else, so people may be stuck in the city even as they watch it burn...
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February 20, 2014, 02:02:09 AM
 #9

This is actually a problem with a lot of situations where you are punished for getting out of line with the consensus. The market tends to settle on a winner early, usually the one that's easiest to get started with, then has a hard time switching off it, even when everybody can see that there are better options. MS Windows, PHP, Mt Gox, QWERTY keyboards, cities built on geological faults, etc etc etc. But this is built with a much stronger incentive to stay with the consensus than any of those, and actually deliberately discourages a coordinated attempt to switch to something else, so people may be stuck in the city even as they watch it burn...

I'm not sure this is as serious a problem as you think it is. I have a fair bit of practical experience with prediction markets (see http://www.gwern.net/Prediction%20markets ), and in the one I am currently competing on, the Good Judgment Project (part of the IARPA competition), there have already been some issues with judging and data sources. They still work. I'd expect the problems to be self-correcting (although I'm still reading the papers so I could be misunderstanding something).

So, suppose John Doe releases an annual contract for annual American GDP growth > 3%. It's the only such contract because it seems so straightforward and clear. Everything is going fine until one year, the number comes in on a knife's edge: if the GDP figure is seasonally adjusted, it's 3.01% and the bulls win, and if it's raw, it's 2.9% and the bears win. The right figure is seasonally adjusted since the non-adjusted version will be predictably wrong when the truly final figures come in years later, *but* everyone is terrified of 'the crowd' not understanding this subtlety, taking the raw number that all the newspapers are trumpeting, and punishing them for disagreeing, so they all vote for 2.9% and the correct forecasters are screwed.

And next year the same thing happens and the prediction market is terrible and cats are living with dogs?

No, not really. Next year, John Doe, having learned from the fiasco, will issue his next version with the tweaked wording 'American *seasonally-adjusted* GDP growth is >3%'. The problem disappears. Alternately: John Doe doesn't learn & does nothing differently, and instead, Jack Frost, angrily remembering how he was burned last year, issues his own variant; now the crowds have a clear interpretation of both contracts: Doe's contract is raw, and Frost's is seasonally-adjusted. Savvy predictors flock to Frost's.

Since everyone can create contracts, good contracts drive out bad ones.

edmundedgar
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February 20, 2014, 02:14:59 AM
 #10

This is actually a problem with a lot of situations where you are punished for getting out of line with the consensus. The market tends to settle on a winner early, usually the one that's easiest to get started with, then has a hard time switching off it, even when everybody can see that there are better options. MS Windows, PHP, Mt Gox, QWERTY keyboards, cities built on geological faults, etc etc etc. But this is built with a much stronger incentive to stay with the consensus than any of those, and actually deliberately discourages a coordinated attempt to switch to something else, so people may be stuck in the city even as they watch it burn...

I'm not sure this is as serious a problem as you think it is. I have a fair bit of practical experience with prediction markets (see http://www.gwern.net/Prediction%20markets ), and in the one I am currently competing on, the Good Judgment Project (part of the IARPA competition), there have already been some issues with judging and data sources. They still work. I'd expect the problems to be self-correcting (although I'm still reading the papers so I could be misunderstanding something).

So, suppose John Doe releases an annual contract for annual American GDP growth > 3%. It's the only such contract because it seems so straightforward and clear. Everything is going fine until one year, the number comes in on a knife's edge: if the GDP figure is seasonally adjusted, it's 3.01% and the bulls win, and if it's raw, it's 2.9% and the bears win. The right figure is seasonally adjusted since the non-adjusted version will be predictably wrong when the truly final figures come in years later, *but* everyone is terrified of 'the crowd' not understanding this subtlety, taking the raw number that all the newspapers are trumpeting, and punishing them for disagreeing, so they all vote for 2.9% and the correct forecasters are screwed.

And next year the same thing happens and the prediction market is terrible and cats are living with dogs?

No, not really. Next year, John Doe, having learned from the fiasco, will issue his next version with the tweaked wording 'American *seasonally-adjusted* GDP growth is >3%'. The problem disappears. Alternately: John Doe doesn't learn & does nothing differently, and instead, Jack Frost, angrily remembering how he was burned last year, issues his own variant; now the crowds have a clear interpretation of both contracts: Doe's contract is raw, and Frost's is seasonally-adjusted. Savvy predictors flock to Frost's.

Since everyone can create contracts, good contracts drive out bad ones.

I don't doubt that the market can sort out the problem of ambiguous or badly-worded contracts (to within reasonable tolerances) but that's not the problem I'm talking about. The key innovation in this proposal is to use a p2p system of consensus witnesses to settle the contracts. It looks to me like the p2p system will collapse into de-facto centralization, at which point the incentive system, which is supposed to be designed to incentivize getting to true outcomes, will actively prevent the market from correcting.
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February 20, 2014, 02:21:08 AM
 #11

I don't doubt that the market can sort out the problem of ambiguous or badly-worded contracts (to within reasonable tolerances) but that's not the problem I'm talking about. The key innovation in this proposal is to use a p2p system of consensus witnesses to settle the contracts. It looks to me like the p2p system will collapse into de-facto centralization, at which point the incentive system, which is supposed to be designed to incentivize getting to true outcomes, will actively prevent the market from correcting.

Alright, you didn't like my concrete example of why the system can be self-correcting; so could you offer a concrete scenario of how an existing prediction market contract from Intrade or somewhere could collapse into a perverse equlibrium? (Being partially centralized is not a bad thing: Bitcoin mining is pretty centralized these days. I don't mind if everyone is getting their figures from an authority like the BLS.)

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February 20, 2014, 03:00:05 AM
 #12

I don't doubt that the market can sort out the problem of ambiguous or badly-worded contracts (to within reasonable tolerances) but that's not the problem I'm talking about. The key innovation in this proposal is to use a p2p system of consensus witnesses to settle the contracts. It looks to me like the p2p system will collapse into de-facto centralization, at which point the incentive system, which is supposed to be designed to incentivize getting to true outcomes, will actively prevent the market from correcting.

Alright, you didn't like my concrete example of why the system can be self-correcting; so could you offer a concrete scenario of how an existing prediction market contract from Intrade or somewhere could collapse into a perverse equlibrium? (Being partially centralized is not a bad thing: Bitcoin mining is pretty centralized these days. I don't mind if everyone is getting their figures from an authority like the BLS.)

Your example doesn't address the bit that I'm worried about. The p2p witness system that has to get to a single consensus decision to settle outcomes is a different thing from the free market system that allows people to choose the best contracts. The latter is indeed self-correcting based on regular free-market principles.

Intrade settlement doesn't have an equilibrium to collapse into - it settles based on a single, central authority (itself), which is incentivized to supply the right data to encourage people to trade and give them a cut.

To illustrate, let me contrast how it's supposed to work to what I think could go wrong. (It might be that I'm just misunderstanding the proposal, in which case let me know):

A. Supposed to work:
1) Everybody makes an independent decision on whether X happened.
2) Everybody has an incentive to match the consensus.
3) The easiest way to match the consensus is to get the correct answer.
4) The answer with the most votes is the correct answer.

B. The way I think it could end up working out:
1) Somebody publishes a convenient data feed saying what happened, pulling from the BLS and a bunch of other sources.
2) 51% of users use the data feed, since it allows them to participate correctly in every vote.
3) Everybody has an incentive to match the data feed.
4) Anyone who wasn't already using the data feed uses it, or gets spanked whenever their judgement diverges from the feed.
5) The data feed produces bad data, because their systems are buggy or they're getting paid off by someone.
6) Anyone who gets the correct data directly from the BLS or wherever gets punished for it by the incentive scheme.

Now, it's true that the lucky monopolist who ended up as the Bill Gates of data feeds probably doesn't have an incentive to screw it up on purpose, and it probably won't be too bad in practice. Often the winners of natural monopolies are pretty good at their jobs - Windows isn't all that bad... But I doubt this is what the designers intend. You have a lot of cost and complexity with all the voting stuff to make the decisions about outcomes decentralized, but then you end up with a de-facto centralized structure anyway, and worse a centralized structure that's hard to fix if it goes bad. If you knew you were going to end up with authorities anyhow I think there would be simpler, more robust ways to do settlement. (For example, skip the voting and let people specify a list of settlement authorities in the contract and a protocol to choose between them if they diverge. That puts your settlement authorities in self-correcting free-market competition as you describe for contracts, rather than lumbering you with the one who won the battle to be the de-facto go-to guy.)

Anyway let's see what the OP says about the centralization issue - maybe I've misunderstood the proposal, or maybe they've got a solution to it.

[Lots of little edits for clarity.]
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February 20, 2014, 03:21:41 AM
 #13

Now, it's true that the lucky monopolist who ended up as the Bill Gates of data feeds probably doesn't have an incentive to screw it up on purpose, and it probably won't be too bad in practice. Often the winners of natural monopolies are pretty good at their jobs - Windows isn't all that bad... But I doubt this is what the designers intend. You have a lot of cost and complexity with all the voting stuff to make the decisions about outcomes decentralized, but then you end up with a de-facto centralized structure anyway, and worse a centralized structure that's hard to fix if it goes bad. If you knew you were going to end up with authorities anyhow I think there would be simpler, more robust ways to do settlement. (For example, skip the voting and let people specify a list of settlement authorities in the contract and a protocol to choose between them if they diverge. That puts your settlement authorities in self-correcting free-market competition as you describe for contracts, rather than lumbering you with the one who won the battle to be the de-facto go-to guy.)

That sounds like my scenario. The voters either notice the bad data coming in and ignore it when voting (similar to how people stopped paying attention to MtGox as it kept fucking up, and a scenario which doesn't require such pervasive incompetence on the part of voters as to enable the data source to do a 51% attack by proxy) or they do a bad vote and then people subsequently issue better markets worded to forbid use of the untrustworthy data source.

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February 20, 2014, 03:35:29 AM
 #14

Now, it's true that the lucky monopolist who ended up as the Bill Gates of data feeds probably doesn't have an incentive to screw it up on purpose, and it probably won't be too bad in practice. Often the winners of natural monopolies are pretty good at their jobs - Windows isn't all that bad... But I doubt this is what the designers intend. You have a lot of cost and complexity with all the voting stuff to make the decisions about outcomes decentralized, but then you end up with a de-facto centralized structure anyway, and worse a centralized structure that's hard to fix if it goes bad. If you knew you were going to end up with authorities anyhow I think there would be simpler, more robust ways to do settlement. (For example, skip the voting and let people specify a list of settlement authorities in the contract and a protocol to choose between them if they diverge. That puts your settlement authorities in self-correcting free-market competition as you describe for contracts, rather than lumbering you with the one who won the battle to be the de-facto go-to guy.)

That sounds like my scenario. The voters either notice the bad data coming in and ignore it when voting (similar to how people stopped paying attention to MtGox as it kept fucking up, and a scenario which doesn't require such pervasive incompetence on the part of voters as to enable the data source to do a 51% attack by proxy) or they do a bad vote and then people subsequently issue better markets worded to forbid use of the untrustworthy data source.

Right, as long as the parties are able to make _individual_ judgements on which authority (or better, combination of authorities) to trust (eg they can choose when they make their contracts), it doesn't matter too much that there are authorities involved. You have a nice competitive mechanism that should tend towards good data, at a reasonable price. Handle the contracts on a p2p network and I think you have a very nice simple, robust solution.

The problem is when as well as handling the contracts on the p2p network, you try to take the decision about what authority to trust away from the individual parties and give that to the p2p network as well. (The proposal doesn't think it does that because it doesn't think it has trusted authorities, but I reckon in the real world it may get them whether it wants them or not...)

Trying to make the network do this via voting is a very interesting experiment and I'd love to see it tried, but I think it has some interesting potential pathologies...
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February 20, 2014, 12:25:13 PM
 #15

seems like you are not the first one with the idea:
http://blog.fairlay.com/2014/02/information-should-have-a-price-but-a-fair-one/


Directbet livebetting
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February 20, 2014, 03:14:07 PM
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People have been talking about doing fully decentralized prediction markets since forever but AFAIK the OP is the first person to publish an actual plan for how you might implement one.
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February 20, 2014, 03:36:14 PM
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People have been talking about doing fully decentralized prediction markets since forever but AFAIK the OP is the first person to publish an actual plan for how you might implement one.

ah you are right about the "decentralized".
Fairlay is certainly not a decentralized prediction market.


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February 20, 2014, 04:47:41 PM
 #18

Let's say I'm an actor with a non-obvious insight into the future effects of Fed policy.

How does Truthcoin incentivize me to add my insight to the market?  My status as someone with non-obvious insight into the future effects of Fed policy means my opportunity cost is rather high.
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February 20, 2014, 11:58:11 PM
 #19

Let's say I'm an actor with a non-obvious insight into the future effects of Fed policy.

How does Truthcoin incentivize me to add my insight to the market?  My status as someone with non-obvious insight into the future effects of Fed policy means my opportunity cost is rather high.

Not speaking for TruthCoin here but any prediction market, especially one that can be used anonymously, should incentivize you to bet on your insight in the hope of making money. When you bet this will move the price (at least somewhat) which will make that price a better indicator of Fed policy or whatever than it would have been without your participation.
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February 21, 2014, 12:06:32 AM
 #20

But if the feed just provides sub-optimal data, or even starts providing outright lies, how does the scheme incentivize people to get back on the right track? It feels like once we're all pulling from Feed X, anybody who tries to deviate from Feed X is going to get spanked, even if Feed X is now full of shit.

I haven't read the whitepaper yet, so I'm pulling this out of my butt, but...what if we made a contract that said, "On February 20th, Feed Y will be more trustworthy than Feed X," where Feed X is the incumbent feed that you feel has been giving bad data?

What if there are 3 feed services and contracts were settled based on the feeds' majority opinion?

What if there were 10 services and contracts are settled on a supermajority of 80% of feeds? Otherwise, if you don't have 80% agreement, then the contract is a draw?

Like I said I haven't thought this through much. Maybe it's best to just dismiss my ideas.

There are two "solutions" to the feed problem: consensus/diversification, and incentivization.

The first involves either spreading your bets among different feed operators, or betting on a (trustless) "average" of feeds. If averaging, ideally the algorithm should weigh feeds somehow (e.g. by volume or transaction number), and creating a bet should have a nontrivial cost (to prevent fake volume).

The second involves incentivizing operators to report values "close" to the consensus. This could come naturally in the form of participants choosing one operator over another (we assume in this case that feed operators are "fungible", even though that isn't the exact definition), or users betting on a consensus value, with operators that report values "closer" to the consensus getting a larger share of the bet fees. As feeds ostensibly apply to actual truths about the world (as opposed to predictions, estimates, etc), I don't think the "lemming problem" is an issue here. On the other hand, I'm not sure how resistant this scheme is to cartels, but for any easily verifiable value (GDP, stock market index, temperature), collusion and cheating should be easily detected.

"Trust, but verify."
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