July 29, 2015

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On Decentralizing Prediction Markets and Order Books

In a new paper to be presented next week at WEIS by Jeremy Clark, we discuss the challenges in designing truly decentralized prediction markets and order books. Prediction markets allow market participants to trade shares in future events (such as “Will the USA advance to the knockout stage of the 2014 World Cup?”) and turn a profit from accurate predictions. Prediction markets have undergone extensive study by economists and have significant social value by providing accurate forecasts of future events.

Prediction markets have been traditionally run by centralized entities that holds all of their users’ funds and shares in escrow, don’t generally allow trades to be routed through different exchange services, and make many important decisions: which events to open a market for, what the correct outcome is, and how to match buyers with sellers. Our work examines the extent to which these tasks can be decentralized to reduce trust in single entities and increase transparency, fault-tolerance, and flexibility. Bitcoin’s success as a decentralized ledger of financial transactions suggests a decentralized prediction market may be within reach. [Read more…]