Bootleggers, Baptists, Prediction Markets and Blockchain
Bootleggers and Baptists is a concept explaining how regulatory or prohibition attempts naturally create coalitions of well-intentioned individuals with insidious rent-seeking actors. In the story, baptists were pushing for outlawing of Sunday sales of alcohol and were supported in this effort by bootleggers profiting from illegal sales.
Event derivative markets, better known as prediction markets provide people with opportunity to bet on outcome of political, cultural and other events. Their most well-known and simplest form is sports betting, but unlike in betting where the bookie sets the odds, contract on a prediction market can be bought and sold between any participants at any time preceding the event, which provides real-time feedback to new inputs influencing the event outcome.
Prediction markets create incentives for people who see discrepancy between contract price and what from their understanding they believe are the real odds of that event happening to take advantage of their knowledge reap profit of their more precise prediction. While media, as much as they would like us to believe cannot take away their biases and poll respondents are often embarrassed to admit they will be voting for a certain candidate, prediction market participants put their money where their mouth is.
As a result, these markets have historically outperformed opinion polls in their ability to predict outcome of events and their reactions have been much faster than those of traditional media. Futures markets (de facto another form of prediction market) have been much more precise in their long-term predictions of climate swings, technological improvements or other factors influencing supply of commodities. When Osama bin Laden was killed, markets trading the respective derivative reacted almost immediately to the first rumor, outpacing mainstream media by half an hour. When UK Prime Minister May stroke a deal with with Northern Ireland Nationalist party, her odds (after dropping below 50% during vote counting which uncovered her position as much weaker than expected) shot up way before the news broke. And while Trump elections were as badly predicted by these markets as by media, Brexit contracts were trading much closer to 50% than what dismissive media and EU elites presented.
Problem is, these markets have been over time outlawed practically everywhere around the world under the pretense of protecting society from harmful betting. Only a handful of them still operate, some with massive restrictions (like $500 position at Iowa Electronic Markets, 5,000 traders at PredictIt), and some in more economically free jurisdictions, where their existence is tolerated (Betfair in Gibraltar). As a result, liquidity is much smaller than it could have been and they remain toxic for many highly regulated or cautious players, who could provide more insight into many events and questions the society faces. Which most probably explains why despite the right set of incentives they failed in some high-profile instances.
One can only imagine, how would many contentious debates about issues with massive impacts on our society look like if people and media had inputs from source with much better track record than individual biased "experts" or poll numbers. Would Cheney-Bush administration get away with Iraq war if markets would indicate it would last for years, kill up to a million Iraqis and thousands of Americans and cost trillions of dollars? Would Obama get away with his "you can keep your plan" lie if experts (even his own administration who knew it was bullshit) could bet on highly liquid contract, which would clearly indicate it was indeed a lie?
It is reasonable to expect things would work out differently in at least some of similar debates, especially if these markets would gain trust over time. Which explains the bootlegger part of the alliance against them. The last things politicians and bureaucrats need is realistic check on their campaign promises and proposals to expand powers of the state or wage wars. They feel much more comfortable with their toothless pet media and top-down control of communication. Moralizing anti-hazard stance comes in handy to justify banning of what might be an unwanted disruption in that central control.
A smart friend of mine came up with a simple decision mechanism around when to use blockchain:
While vast majority of today's proposed applications intend to use blockchain - a distributed ledger technology for trustless transactions - to applications where trust is not an issue, or worst case there is not even real use for any ledger, Blockchain's first application - Bitcoin - was in creating medium of exchange, which is the most serious crime against states whose house of cards would collapse if they lost monopoly over money printing press. As I wrote three years ago, blockchain-based products could serve ride-sharing consumers in places where Uber gets banned and the same applies to prediction markets thanks to upcoming developments in Bitcoin (Cash) protocol.
The technology, which will allow this is called two-way pegs. It is a mechanism by which a separate blockchain is pegged to Bitcoin blockchain. De-coupling the transaction logic into separate blockchain allows for more complex transaction logic and smart contracts without bloating Bitcoin's by-design simple transaction architecture. The peg then enables monetary settlement using bitcoins as media of exchange and allows use of Bitcoin's massive network strength to provide similar level of security. There are several applications of two-way pegs, most prominent are sidechains by Blockstream, drivechains by Paul Sztorc or Rootstock, which combines and improves on these two.
What this can bring to prediction markets is censorship resistance by decentralization (or rather distribution) of operations and settlement, although the actual ability will depend on its implementation and support by miners and users. While miners' marginal operational costs in drivechain design is virtually zero, they still need incentives to bring support to the network.
Bitcoin Hivemind is Paul Sztorc's own prediction markets implementation of drivechains (I am in no way affiliated, only have been following the project and Paul for years). It is considered to be production-ready quality, waiting only for implementation of the peg into Bitcoin (or Bitcoin cash)'s protocol.
There are two types of tokens in Bitcoin Hivemind: Cash coins and Vote coins.
Cash coins are tokens pegged to bitcoins. They are owned by Hivemind users who want to bet on events (buy or sell event derivatives). The user first locks Bitcoin blockchain balance they want to use for trading which creates representative amount of cash coins in Hivemind's blockchain. Cash coins can then be used to trade contracts and are transfered between Hivemind users during trading and settlement. When user sells contracts or when those mature and get automatically settled, the user can withdraw their balance by reversing the Bitcoin-Hivemind peg and releasing their balance in Bitcoin blockchain. Of course if they won some additional balance from other users within Hivemind blockchain, the ownership of the peg would transfer to them and they would be allowed to release what used to be the other user's Bitcoin balance.
The other type of tokens are Vote coins and they serve two purposes: they represent equity in the distributed company and allow (in fact incentivize) their holders to vote on outcome of events when the contracts mature. For example when there is a contract for election result and maturity of that contract would be day after the elections, vote coin holders get to vote on the results, deciding settlement of the contracts. They are incentivized to vote and to vote truthfully because if they don't vote or vote against the consensus, they get penalized by losing their equity share. This way they provide distributed source of truth and for this, they receive reward in form of fees from contracts settlement.
Miners can use the same proof of work they use for mining Bitcoin to mine Hivemind blockchain, so their marginal costs are virtually zero. Whether they actually will do it depends on how much fees they can collect, which depends on how much will users actually trade. That of course means solving the chicken-and-egg problem of liquidity and will require user-friendly tools for trading, but that's a separate story.
Because this whole mechanism is distributed and pseudonymous, once sufficiently supported by miners, it will be virtually impossible to censor, ban or shut down. That is why Roger Ver said "Hivemind may be the most important invention since Bitcoin itself".
What is required now is implementation of necessary changes in Bitcoin (or Bitcoin cash)'s protocol and even then it is still a long path to liquidity and user base necessary to serve the purpose of reliable source of estimates and predictions. It will require easy-to-use tools and wide base of earlyvangelists. But the potential to provide profound and positive impacts to the society is so massive, it is well worth watching, investing and being a part of.