This post assumes knowledge of prediction markets and why they are so accurate and powerful. You might be interested in prediction markets for dash governance.
The Problem – how to make the best bitcoin governance decisions
Bitcoin has no good way to make governance decisions, so often no decisions are made. This causes bitcoin to stagnate and make less forward progress. Meanwhile our competitors, both in government currency and altcoins, do make forward progress and take demand and market share away from bitcoin.
Stalemates foster infighting and division in the community, and resentment between proponents of different proposals. All of this prevents bitcoin from reaching its potential and decreases bitcoin’s price and relevance compared to competitors.
Proposed solution – decision markets
Decision markets could help with bitcoin’s governance problems, such as the stalemate about how to scale bitcoin. Decision markets could compare what the outcomes of implementing competing Bitcoin Improvement Proposals (BIPs) or bitcoin client versions would be.
We want outcome measures which are hard to game, well defined and have reliable data sources. The decision markets will recommend decisions to maximise the outcome measures. Here are some possible examples.
The value of 1 bitcoin
To shield the market from distortions unrelated to bitcoin (like the US dollar crashing) “The value of 1 bitcoin” would refer to a trade-weighted effective exchange rate index of government currencies, commodities and altcoins.
To stop “node count” from being gamed it would refer to something like a 30 day moving average of the node count, or the number of nodes which have had 95% uptime for the last 30 days.
Transactions per second is easy to game if transaction fees are low. As such these markets could have a condition that the 30 day moving average of transaction fees is over x satoshis per byte.
Example decision markets
Forecast the outcomes of competing clients
To accurately predict the results of competing clients we could have decision markets like:
If Bitcoin ABC is the majority hashpower client, what will the value of 1 bitcoin be on January 1st 2019?
If Bitcoin Core is the majority hashpower client, what will the value of 1 bitcoin be on January 1st 2019?
These markets recommend miners run whichever client is predicted to result in the higher price.
Forecast the outcomes of different block sizes
To accurately predict the results of different block sizes we could have decision markets like:
If blocks larger than 8mbs are valid, what will the node count be on January 1st 2019?
If blocks larger than 8mbs are not valid, what will the node count be on January 1st 2019?
This will tell us to what extent larger blocks will effect the node count.
Forecast the outcomes of competing BIPs
Suppose BIP123 and BIP789 are directly competing to increase the amount of on-chain transactions per second that the network can handle. We could make markets like:
If BIP123 is activated, what will the on-chain transactions per second be on January 1st 2019?
If BIP789 is activated, what will the on-chain transactions per second be on January 1st 2019?
These markets recommend we implement the BIP that is predicted to result in the highest transactions per second.
Learn to walk before you run and don’t compel people
It was fascinating and frustrating to see the guys at Epicenter Bitcoin discuss using decision markets for bitcoin governance with Dr. Robin Hanson, the godfather of prediction markets [blog] [academic papers] [videos].
As soon as it comes up that decision markets could help with bitcoin governance (52:31 in the above video) they look for a way to centrally plan all bitcoin governance and development through futarchy. Brian then throws his arms up in despair when they can’t think of an easy way to implement decision markets in bitcoin that compel people to implement their recommended decisions.
This is a discussion happening before any prediction markets on bitcoin governance questions even exist. Let’s not get ahead of ourselves.
There is no need to make a convoluted futarchy governance structure with binding decisions that directly update node software or anything like that. These markets would be run to make recommendations for what decision to implement. Nodes, particularly miners, signaling preferences and running code would still be the way decisions are implemented.
As the decision market’s recommendations prove to be good, over time they would become increasingly followed and relied upon. Hopefully to the point where they are the main decision making mechanism in bitcoin governance.