Prediction markets for Dash Governance

This post assumes knowledge of prediction markets and why they are so accurate and powerful. This post also assumes knowledge of the dash treasury system. You might be interested in prediction markets for bitcoin governance.

Introduction

The dash treasury system and decision markets are a perfect fit for each other. Decision markets can help masternode operators make optimal votes on whether or not to fund proposals. I suggest we run the following decision markets for every dash treasury proposal.

If [proposal name and id] is funded, what will the value of 1 dash be on [date 12 months after the proposal is funded]?
and
If [proposal name and id] is not funded, what will the value of 1 dash be on [date 12 months after that proposal would have been funded]?

If the 1st market trades at a higher price than the 2nd market it would be an indication that masternode operators should vote to fund the proposal, because it will result in a higher dash value.

Decision markets are perfect for the dash treasury

Dash masternode operators have to decide whether or not to fund dozens of proposals every month based on very little objective information. Votes are usually cast according to subjective opinion and guess work with almost no real data or expertise.

Decision markets can provide an accurate forecast of the effects of funding, or not funding, a proposal. They can leverage the wisdom of the crowd to recommend how masternode operators should vote based on what they care about the most.

The dash treasury is perfect for decision markets

The dash treasury system is the perfect environment for decision markets to be effective. The structure of proposals, voting and funding provides a ready-made framework to make decision markets on.

The dash treasury system meets all requirements for decision markets to be successful including:

  • An official source of policy proposals that must be considered. These proposals are limited in number by the proposal fee.
  • Clear timeframes. Voting on and funding proposals happens with predictable regularity which markets can be built around.
  • Ideal if statments and outcome measures are available, detailed below.
  • Anonymity.
  • Masternode operators (the decision makers) want and need help in making the decisions.

The markets

Decision markets need 3 things to be constructed properly.

An if statement

Decision markets need a clear if statement that results unambiguously to true or false. The source for determining the result should be defined when the market is created.

For our dash governance decision markets I suggest “If [proposal name and id] is funded…” with the source being dash APIs.

An outcome measure

Decision markets should have a well defined outcome measure which is hard to game, has reliable data sources and continues to be hard. Decision markets will recommend the decision which maximizes the outcome measure. The first 3 example outcome measures below could apply to all proposals, you could also make specific outcome measures that are relevant to specific proposals.

The value of 1 dash

To shield the market from distortions unrelated to dash this would refer to a trade-weighted effective exchange rate index of currencies and commodities.

Node count and/or masternode count

To make “node count” harder to game 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.

Transaction volume

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 duffs per byte.

Proposal specific outcome measures

You could make unique decision markets for certain proposals. For a proposal that promises to make a dash debit card available 6 months after funding, we could have a decision market like

If [proposal name and id] is funded, will the dash debit card be available [date 6 months after the proposal is funded]?

making decision markets like these would add to the workload of running the service because each proposal would have to be individually considers but it would be worth it.

A timeframe

Decision market participants need to know

  • When the market will be open for trading. In our case this can be as soon as the proposal is active on the network.
  • When the if statement will be determined. This is known because all successful proposals in a budget period get paid out at a pre-determined block height.
  • When the outcome measure will be measured, the market’s result determined and contracts paid out. I suggest 12 months after the proposal receives funding. Any longer and people won’t be interested in trading during the voting period, any shorter and we have not given proposals long enough to have their full effect. Decision markets made specifically for certain proposals could use other timeframes if appropriate.

The platform

To be successful the decision markets need to be:

  • Accessible.
  • Easy to use, well run, reliable and bug free.
  • Anonymous.
  • Censorship resistant.

Development and maintenance of the platform can be funded by the dash treasury system!

There are 2 main models that could be used to create the platform; a centralized account based website or a decentralized platform. An implementation could use elements from both and accountless trading could be a compromise.

A centralized account based website

A website that gathers data from dash APIs to generate decision markets for each proposal. Users sign up anonymously, deposit dash into their accounts and trade on the markets. Much like a betting, forex or trading site.

Advantages of this approach are:

Disadvantages of this approach are:

  • High trust. Users trust their funds and data to the site which could misuse it or have it stolen. To reduce this risk the site should be open source and cryptographically prove it holds all users funds.
  • Censorable. Centralized services can practice censorship or be censored themselves by governments. To reduce this risk the site should use a canary statement.

Accountless trading

Run the markets though a website as described above but make the trading accountless, with all trades and payouts as dash transactions. This is similar to how the original Satoshi Dice and DirectBet offered accountless betting.

The trader would:

  1. See the decision markets on the site.
  2. Tell the site the trade he wants to make.
  3. Provide the site a payout address.
  4. The site gives the trader a unique dahs address.
  5. The trader makes the trade as a dash transaction to that address.
  6. If we want the trader to have the ability to trade out of his position before the market is settled, he would have to be provided tokens that represent contracts he has bought which he could then sell back on the market.

This reduces the trust required in the site but it does not eliminate it. The increased complexity makes the platform harder to develop and use.

A decentralized platform

Projects like Augur with ethereum smart contracts and Bitcoin Hivemind with drive chains are very close to offering decentralized cryptocurrency prediction markets. Their code is open source and maybe a team of wizard cryptographers and software engineers could pull this off.

Some features that could ensure the decision markets are traded on and therefore relevant include:

Integration into other platforms

The decision markets recommendations should be displayed and linked to on sites where masternode owners go to vote or get information about proposals [1][2][3][4]. Platforms that allow masternode operator to vote on proposals, like Dash Central and dash qt wallet, could give masternode operators the option to automatically vote in accordance with the decision markets recommendation.

Incentivize participation

Masternode operators could verify their control of a masternode and be given some free dash to trade with, or a 1:1 deposit match. Dash miners and full node operators could be similarly incentivized if there is a way to verify their hash power and node uptime to prevent bonus abuse.

Help, don’t compel

The most bullish decision market believers, who realize how clueless masternode owners are about what they vote on, might advocate a Futarchy governance model where the prediction markets recommendations are automatically implemented on the network.

This should not be attempted. First we need these decision markets running well with a lot of liquidity. Once their recommendations prove to be good over time they will be more and more used and relied on by masternode operators voting on proposals.

A powerful step would be for the dash qt wallet and dash central masternode voting service to give its users the option to automatically vote in accordance with the decision markets recommendation. If this was a popular option it would be the deciding factor on proposals being funded or not. This would achieve Futarchy without compulsion.

Challenges

Liquidity

These decision markets would need real trading by real dash users to be accurate and useful. Dash is such as small ecosystem that it would be challenging to attract enough liquidity.

Technical

There are only technical challenges to doing this as a decentralized platform. Doing it through a centralized account based website would be relatively straight forward, but that would make it more challenging legally.

Legal

This could be considered real money trading by authorities. This could mean licensing, know your customer (KYC) and anti-money laundering (AML) procedures may be legally required. Their absence could result in legal action and shut downs.

Licensing, AML and KYC compliance would be very difficult and any effort in that direction would reduce the accuracy of the decision markets, reduce liquidity, increase the risk of censorship and increase the risk of data and funds loss due to hacking. It would make the idea a non-starter for a lot of people including myself.

The platform could minimize the risk of law enforcement action by being run anonymously, never touching government currency and never hosting decision markets on anything other than the effect of dash treasury proposals. These measures would make this service less offensive to law enforcement.

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