International Forecaster Weekly

Prediction Markets Arise on the Blockchain

Our good friends at the CIA wrote a lengthy defense of the PAM project and prediction markets in general in 2007, so you can bet that it went ahead under a blanket of classification secrecy at some point.

James Corbett | July 27, 2018

So, you know how decentralized technologies are making it possible to do things that were completely impossible before? Like creating uncensorable information storage and retrieval networks or circumventing the gun laws of the would-be tyrants?

Well, how about if it could also allow you to bet on anything? And I mean anything.

Doesn't sound so amazing? Well, what if we're not talking about placing a bet on the outcome of the next Super Bowl, but the time and location of the next terror attack? Or the likelihood of the President of the United States being assassinated?

Most of us understand that betting on such things is deeply irresponsible and unethical. After all, if a gambling market creates a financial reward for those who predict an event, then it also provides an incentive to make that event happen, no matter how horrific. Why just commit a political assassination when you can also profit from that assassination?

Well, guess what? You don't have to wait for this hypothetical prediction market to be created. It already has. It's called Augur, and it's currently running on the Ethereum network.

Augur bills itself as a "prediction market protocol owned and operated by the people that use it," meaning that it is a place where users can create a market to buy and sell shares based on the outcome of any given event. Want to bet where Amazon is going to place its next headquarters? Just create a market and place your bet. When the decision is announced, the market is resolved and those holding shares of the winning outcome (Nashville, say) are paid out from the market contract.

...for those who are a bit put off by the whole idea of people betting on assassinations or terror attacks, here's a "shocking" piece of news for you: the government thought of it first!

So far so non-revolutionary, right? After all, prediction markets have existed before. Ireland-based Intrade, for example, was a popular online market where people placed bets on everything from the outcome of US political elections to the outcome of the Academy Awards . . . until it was shut down by US federal regulators in 2012. Apparently, the site was also allowing people to bet on commodity prices without jumping through the proper CFTC hoops and Uncle Sam swooped in to put an end to that. At the time, the director of the CFTC's Enforcement Division warned that "We will intervene in the 'prediction' markets, wherever they may be based, when their US activities violate the Commodity Exchange Act or the CFTC's regulations."

This type of regulatory intrusion has made it difficult for prediction markets to really thrive, even in the wild west of the internet. As Ian Edwards notes in his Medium.com post on the subject:

"Most governments see online prediction markets as either gambling or options trading and heavily regulate them. As a result, today they are only available in certain jurisdictions with limited types of events. Some of the largest commercial ones are Betfair, BETDAQ, and Smarkets, which are primarily used for sports betting, horse racing and other forms of gambling. Prediction markets affiliated with universities, such as the Iowa Electronic Markets or PredictIt, generally focus on political events. Most exchanges earn revenue by charging fees that are calculated as a percentage of net winnings for each customer on each event.

"The story of the Intrade is illustrative of what happens when an online betting exchange runs afoul of government regulation. Founded in 1999, Intrade gained widespread media attention for the accuracy of the political forecasts on its site during the 2008 and 2012 U.S. presidential elections. But in 2012, Intrade was sued by the U.S. federal government for unregulated trading in commodities, and subsequently excluded all U.S. residents from accessing the site. Following this, Intrade saw a dramatic decrease in trading volumes, and closed its doors in 2013."

Jackbooted regulators salivating at the chance to stop free people from engaging in voluntary, peaceful behavior? Color me shocked.

So how is Augur getting away with it? Well, as their FAQ helpfully explains: "Augur is a set of smart contracts written in Solidity that can be deployed to the Ethereum blockchain."

English translation: "It's all handled through smart contracts on the blockchain, suckers! There's nothing tangible for you to shut down!"

And so, as you might expect, it was only a matter of weeks before the first assassination markets appeared on Augur. As CCN.com reports, the "Will Trump be killed this year?" market has traded 50 shares so far. (For those who are interested, the market is currently giving the event a 5% chance of coming to pass.)

Creepy, right? Well, it's an open-source, decentralized protocol, and the development team has just burnt the "kill switch" they built in case anything went wrong with Augur's deployment, so there's really nothing that can be done to stop these bets from taking place now. The various decentralized application browsers can choose to hide such controversial markets from their users and individual markets can be flagged as unethical, thus freezing payouts, but no one can stop the bets themselves from happening.

But for those who are a bit put off by the whole idea of people betting on assassinations or terror attacks, here's a "shocking" piece of news for you: the government thought of it first!

That's right, on July 28, 2003, the Defense Advanced Research Projects Agency (yes, good old DARPA) announced the Policy Analysis Market (or "PAM"), boasting that it would allow traders to bet on coup d'etats, assassinations, terror attacks, wars and other major events, thereby helping the Defense Department to predict the likelihood of such events. To which, the collective response from the public, the press and even the congress critters was (to paraphrase): WTF?!

In fact, such was the level of scorn heaped upon the idea (the words "ridiculous and grotesque" and "useless, offensive and unbelievably stupid" were employed by Senators Wyden and Dorgan, respectively) that the project was scrapped later the same day. (Yes, the same day!) It even caused disgraced Iran-Contra criminal John Poindexter to resign his post as DARPA's director.

Don't worry, though. Our good friends at the CIA wrote a lengthy defense of the PAM project and prediction markets in general in 2007, so you can bet that it went ahead under a blanket of classification secrecy at some point.

And if you want to talk about betting on terror events, what better place to start than the 9/11 informed trading, where (surprise, surprise) all the fingers of suspicion point at high-placed government officials and their friends.

So if prediction markets are good enough for Uncle Sam, they must be good enough for us plebs, right? Well, the users of Augur seem to think so, anyway. Participant or not, it will be very interesting to see how these markets develop.