Author Topic: Do Markets need to resolve at all?  (Read 4716 times)

Troy

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Do Markets need to resolve at all?
« on: October 15, 2014, 12:13:04 am »
I am curious what would be the effect if an individual could author a market that is open indefinitely and completely exempt from a final resolution via Vote. I've been studying the nature of the bitshares market peg which has been remarkable. If a TruthCoin market were to be open indefinitely, would the market be able to peg the price of the assets at a value very close to their true ending value? Could market manipulators ever really be able to win in the end when they would be at permanent risk of losing a tremendous amount? In order to force a wrong decision, malicious parties would have to keep pouring more and more CashCoin into a truly worthless asset while buyers on the other side would be risking very little. And the only way for manipulators to liquidate their shares which they would have artificially inflated, would be to start selling their shares, driving the prices back towards the true outcome which would almost certainly yield a massive net loss since there will be very few buyers who aren't manipulators themselves. Eventually the manipulators either run out of money to keep propping the prices in the wrong direction, or they have to start selling and collapse the value of the shares they do own. Buyers who know the correct outcome (which is everyone in the world) have every incentive to keep buying cheap relentlessly and burn out the bad guys.

Granted, the bitshares market peg system does not attempt to peg prices at a final fixed value at one end of a fixed range. A market open indefinitely with no resolution could probably never actually achieve a perfect ending, but would it still work? I guess I'm wondering if the VoteCoin and human decision process is even necessary for any particular market at all.
« Last Edit: October 15, 2014, 12:33:08 am by Troy »

Troy

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Re: Do Markets need to resolve at all?
« Reply #1 on: October 15, 2014, 12:57:46 am »
I am curious what would be the effect if an individual could author a market that is open indefinitely and completely exempt from a final resolution via Vote. I've been studying the nature of the bitshares market peg which has been remarkable. If a TruthCoin market were to be open indefinitely, would the market be able to peg the price of the assets at a value very close to their true ending value? Could market manipulators ever really be able to win in the end when they would be at permanent risk of losing a tremendous amount? In order to force a wrong decision, malicious parties would have to keep pouring more and more CashCoin into a truly worthless asset while buyers on the other side would be risking very little. And the only way for manipulators to liquidate their shares which they would have artificially inflated, would be to start selling their shares, driving the prices back towards the true outcome which would almost certainly yield a massive net loss since there will be very few buyers who aren't manipulators themselves. Eventually the manipulators either run out of money to keep propping the prices in the wrong direction, or they have to start selling and collapse the value of the shares they do own. Buyers who know the correct outcome (which is everyone in the world) have every incentive to keep buying cheap relentlessly and burn out the bad guys.

Granted, the bitshares market peg system does not attempt to peg prices at a final fixed value at one end of a fixed range. A market open indefinitely with no resolution could probably never actually achieve a perfect ending, but would it still work? I guess I'm wondering if the VoteCoin and human decision process is even necessary for any particular market at all.


Of course, if that kind of magic did truly work, it would cut out a massive amount of complexity from the specification. It would also make it much more difficult to raise funds for more development (no VoteCoin auction). Although, devs would still have an opportunity for fundraising by authoring some potentially very profitable markets which would be immediately accessible to all bitcoin users. Not quite the same bang as an auction, since CashCoin value is not guaranteed, but such a plan change would add credibility by demonstrating that the devs truly believe in the coin as opposed to cutting and running with auction proceeds.

psztorc

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Re: Do Markets need to resolve at all?
« Reply #2 on: October 15, 2014, 01:19:23 am »
I'm actually planning a blog post about this, for when I start my blog, so stay tuned.

From my point of view, BitsharesX is not really a market (as the price is literally set by a committee of delegates). In this way it is technically (and surprisingly) Stalin-Communist. Economic science has scientific predictions on what happens under centrally-planned price-fixing, which we can compare (favorably [accuracy wise]) to BitsharesX.

I don't really want to get into it now (have lots of stuff to do, and want to be able to have my full say in writing), but it is actually a problem that BTSX : BitUSD tracks as well as it does. Instead, BitUSD should be permanently cheaper, for as long as there is technical and social risk associated with the BitsharesX project. "How much cheaper" is set by the market itself, but it might need to be quite substantial at first (imagine early Bitcoin, worth essentially nothing).

Without the price feed guardrails, someone can easily create a 'grey swan' super-long against BitAssets witch collapses the value of BTS and the whole BitsharesX system. One can even do this now by selling even a few % of BTS currency on external exchanges. Though rare, this is inevitable (its like a pet dog dying...probably won't happen today, will definitely happen during the next 15 years). Tying everything to BTS is a huge risk - incentive to manipulate everything at once, if you manipulate at all.

But you actually have your answer, I think: BitsharesX tried "markets which were open indefinitely" and no one wanted what it was selling (which is precisely because $1 was too expensive for 1 Bit$. The volume was microscopic (probably all devs or testers) and usage was zero.
Nullius In Verba

Troy

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Re: Do Markets need to resolve at all?
« Reply #3 on: October 15, 2014, 03:18:24 am »
Yeah, I do have a problem with BTSX too. For me, mostly because of how it fails to provide an adequate solution to the naked short. You can be forced to provide a certain amount of collateral, but when there is no upper or lower bound on the possible price, no amount of collateral is enough to prevent a short squeeze that is large enough to break the system and crash the value of BTSX. BTSX can't be used to track things that could be highly volatile, which is also why it appears to be somewhat difficult/expensive to create a BTSX asset. I would argue with a prediction market though, there is no need to have any mechanism to control volatility (like their delegation system), because there is always a fixed range on the possible values of an asset. Both the 'long' and 'short' sides have a finite, opposite, risk. They are opposite sides of the same coin. Any attempted manipulation towards the wrong answer would be unsustainable for the reasons described previously. The actual value of the CashCoin, of course, would certainly come into play -- but I'm not sure I'm convinced yet that a malicious attack on a market could cause a crash of the value of the coin so long as the attack is guaranteed to be doomed to failure because of the market mechanics.

BTSX is not built for prediction markets. Nxt has a different approach, but from what I can tell, Nxt assets are not conducive to prediction markets either because they require the asset owner to issue shares as opposed to the shares being created by the market participants and whose properties and txn fee behavior is determined by the definition of the market. See NXT asset id: 10185950182542481875 (DemPOTUS16) and 1115687958997024723 (RepPOTUS16):
"Issuer will seek to maintain inverse parity between the two assets. Issuer will seek to distribute the assets at prices comparable to external prediction markets. Issuer commits to buy back all shares of the "correct" asset upon resolution at 100 NXT and will reserve sufficient funds to do so."
Dafuq? Why should the issuer be responsible for issuing prices comparable to external markets, maintaining inverse parity, and buying back the correct asset? That could all happen automatically in a decentralized manner. No wonder this asset never went anywhere.

I can certainly say, ever since the demise of Intrade, at least in the US there has been a very strong demand for another comparable option that isn't a sportsbook with house odds. It would not surprise me if there would immediately be a significant amount of interest especially in the political markets, if there were a system such as TruthCoin that is built specifically to be a prediction market and also happens to be immediately available to all bitcoin users. Even if CashCoin were to have $0 market cap, because current bitcoin users are getting their initial CashCoins for free. It would be an entrepreneurial chance to gain more CashCoins which have the potential to appreciate significantly in value, while having nothing to lose.

You may still disagree (perhaps for good reasons I am not seeing yet), but I am interested to listen to your continued thoughts whether here or on your blog ---
« Last Edit: October 15, 2014, 03:31:52 am by Troy »

zack

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Re: Do Markets need to resolve at all?
« Reply #4 on: October 15, 2014, 03:53:37 pm »
Yes, markets need to resolve.

Troy

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Re: Do Markets need to resolve at all?
« Reply #5 on: October 15, 2014, 10:48:10 pm »
Yes, markets need to resolve.

Could you elaborate? What is the worst case scenario that could occur in a market that does not resolve? The way I see it, the worst case is that the winners may have to settle for just a small token under 100% in order to cash out. In my view, any effort at prolonged manipulation of the price will inherently result in a net loss for the manipulators and is inherently unsustainable.

I'm not necessarily suggesting scrapping the resolution system altogether. Maybe the resolution method can be defined by the market author in the definition of the market. As in, whether the market will close with an official resolution using VoteCoins at all, and if so, what the value of phi is. I'm just not convinced that it needs to close. Even if a malicious entity owned 51% of all CashCoins, if they attempted to fix a market price to the wrong end (strong arm it, buying up the orders on the wrong side), you would only need a small minority of CashCoin owners to buy the correct shares cheaply and burn out the manipulators for a huge profit.

zack

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Re: Do Markets need to resolve at all?
« Reply #6 on: October 15, 2014, 11:04:52 pm »
you would only need a small minority of CashCoin owners to buy the correct shares cheaply and burn out the manipulators for a huge profit.

You are assuming that the losers will sell their shares first, causing the price to change, and then the winners will sell their shares second.

It is a symmetric game. Whichever side sells shares first will end up losing more money. They will both hold out as long as they can, hoping that the other side sells first.
Eventually all of the shares are cashed out. The only money left is the B*ln(N) that was initially invested.

Would the B*ln(n) be trapped eternally?

Zocalo

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Re: Do Markets need to resolve at all?
« Reply #7 on: January 26, 2015, 07:16:28 am »
Markets have to be resolved in order for participants to see the proper incentives to bet their actual beliefs.

If markets don't close, then those on the losing side have little incentive to sell their shares. The people with the right answer want to get their 100%, and will object to every micro-unit by which they have to compromise. It's also the case that those on the losing end have no incentive to close their bets out at all. They may even have abandoned their holdings, and can't be enticed back at any cost.

The markets have to be resolved.

vbuterin

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Re: Do Markets need to resolve at all?
« Reply #8 on: February 12, 2015, 07:33:48 pm »
I don't really want to get into it now (have lots of stuff to do, and want to be able to have my full say in writing), but it is actually a problem that BTSX : BitUSD tracks as well as it does. Instead, BitUSD should be permanently cheaper, for as long as there is technical and social risk associated with the BitsharesX project. "How much cheaper" is set by the market itself, but it might need to be quite substantial at first (imagine early Bitcoin, worth essentially nothing).

But you actually have your answer, I think: BitsharesX tried "markets which were open indefinitely" and no one wanted what it was selling (which is precisely because $1 was too expensive for 1 Bit$. The volume was microscopic (probably all devs or testers) and usage was zero.

So there is an interesting problem (or, depending on how you look at it, conclusion) of this style of reasoning. If you have any argument A that states that the price must be less than $1 because of risk, and you model it and determine that the price should be $k < 1, then you can also see that the price in the best case will be $k, but then you apply argument K and then because of risk the price should be $k^2. Repeat by induction and the price approaches zero.

So "trading at a discount" is not an appropriate conclusion for an asset that has higher risk and lower reward. Either complete collapse is, or if the asset is useful for some specific reason, then low volume.

psztorc

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Re: Do Markets need to resolve at all?
« Reply #9 on: February 12, 2015, 08:55:11 pm »
price in the best case
Not the best case, just a normal case.
Nullius In Verba