Warren Buffett is often called the ‘Oracle of Omaha’ because of his legendary ability to pick the right investments. Making sound decisions is thus important: it is based on good decisions that we can expect good outcomes.
Collectively the markets can play the role of an oracle as well. What if we could devise a system which would use the collective wisdom of the markets to help form better policy or devise effective governance models that could actually deliver.
Can we come up with a system that would allow poor countries to make better decisions for their upliftment or help people perceive how their future might unfold? What if it was possible to create an entire prediction market? Ethereum offers a unique opportunity to do just that.
A prediction market to gauge the future
Gnosis is based on Ethereum and aims to offer a prediction market as a service. Their aim is to enable people to figure out what is going to happen in the future. They want to act as an oracle and will allow users to create events and fund them as either single investors or as a crowdfunded campaign for this purpose.
Cointelegraph talked with Matt Liston who is a Startgeist at Gnosis about how Gnosis works and he says:
“Gnosis enables anyone, anywhere, to speculate on the outcome of events with financial incentive. It is an indispensable tool to create more efficient information economies. Applications of Gnosis are incredibly wide ranging, from more flexible and efficient sports betting and financial instruments, to novel forms of governance, insurance, action incentivization, information aggregation, and much more! The Gnosis platform will enable anyone to create new applications very easily. Our goal is to make this process as simple as setting up a new Facebook page. Gnosis will serve as a toolset and shared liquidity pool for the next generation of markets.”
Shaping policy with markets
The prediction markets can provide useful data that can be used to create a governance model termed as ‘Futarchy”. This can be useful to reshape policy for a wide array of topics.
One example can be the plans of Gnosis to reshape their own Decentralised Autonomous Organisation (DAO). Gnosis plans to create a platform level DAO that will allow anyone to suggest to veto a funding proposal that has been created by the core team.
After a veto opens it will trigger a futarchy mechanism that creates two types of Gnosis tokens Matt Liston explains:
“One token (A) has a value of one Gnosis token if the proposal passes, and the other (B) has that value if the proposal does not pass. These tokens will be tradable on a market. Those participants who believe the proposal is not in the best interest of Gnosis should sell token A and keep token B. Conversely, those who support the proposal should sell token B and keep token A. In this way, the exchange rate between these tokens represents the demand for a proposal to pass or not pass. After a certain amount of time the decision is made corresponding to the token with higher value.”
Can the market decide everything?
Although markets are known to be capable of factoring in future events to a certain degree and take them into account, it is a well known fact that socio-political or sudden economic upheavals can cause markets to behave erratically. While this is true of regular economic markets, it is also true of a prediction only model.
We asked Matt Liston about what he thinks markets or voters will not be able to foresee. We also asked him about potential issues that may be caused under this system.
He was of the view that the two categories of events that cannot be accurately forecasted by the prediction markets are those, which involve some form of existential threat and those that can’t be easily decided.
He offered examples like “Will an asteroid wipe out humanity” and “Does God exist?” for both of these classes of problems. The reason why existential problems can’t be easily decided are because they threaten the very continuity of the markets and thus there is no incentive to make a prediction.
As for those events that can’t be easily decided, the predictions are not likely to be accurately resolved according to Matt. Problem areas that may affect the prediction markets are lack of volume and lack of experts that provide unique knowledge.
However, Gnosis believes that such problems are likely to be ‘negligible’ as they think that if the proposal is contentious enough that it would attract ‘enough’ participation.
Need for experimentation
One of the issues with DAO has been the lack of good old-fashioned lab testing. Gnosis told us that they are not convinced that the participation and consensus requirements for funding projects in the DAO was sufficient.
This rings true considering traditional funds require a far more stringent agreement before they would finance a project. It is also true that traditional funds usually have onboard paid experts.
Gnosis though are excited about future possibilities related to DAO governance, they say:
“We have received a generous Ethereum Dev grant which will be used to test some of the cryptoeconomic assumptions for Futarchy, particularly how easy it will be for actors to manipulate market values when incentive is provided. We hope that this, and tools which we will create, will form a foundation for future DAO governance work.”
The DAO fork may open a can of worms
Although Gnosis themselves have not made any hard predictions on the coming hard fork in Ethereum after the DAO incident, we did ask them what they thought about it.
Matt Liston remarked:
“I hope that the hard fork does not open a can of worms in terms of precedent, however I believe that it is the more practical decision. Some will argue that the hard fork contradicts principles of immutability. However, the hard fork is limited to modifying transactions related to the attacker DAO and the process of deciding on a hard fork is a form of social consensus which is coded into the system itself.”
Markets need an informed base
The idea that markets can drive policy is an interesting one. Even elected governments use technocrats and civil service to guide policy because they are judged to be experts in their own fields. In order for markets to make sound policy decisions, there is a need for participants to be informed. It is not simply possible to solve complicated policy issues with a mere tyranny of a majority.
The question that would be interesting in the future is if these type of prediction markets trickle down to the mainstream body of people or if they remain the preserve of an exclusive group. Although it must also be said that the importance lies in the questions that are being put to the market.
In super specialised fields the nature of the questions might attract a certain type of an ‘investor’. In more broad based problems, the general public might become involved because it is a question of mass-appeal.
As for Gnosis, they have a definite thought about this, as Matt Liston says:
“Those participating should have intimate knowledge of the workings of Gnosis. Many will be cryptocurrency or prediction market enthusiasts and will have a vested interest in the success of the platform.”