An Introduction to Cryptoeconomics and Futarchy experiments on Gnosis


#1

Over the next few months we will be running several experiments on
the Gnosis prediction market platform thanks to a generous Ethereum DEV
grant. These experiments will test cryptoeconomic hypothesis and methods
related to market manipulations and Futarchy and were inspired by
Vitalik’s reddit post on Empirical Cryptoeconomics. Each experiment
consists of a market on Gnosis, a smart contract or set of smart
contracts outputting some value to settle the markets, and shares that
will be auctioned off and provide an incentive for manipulators to shift
market values away from their expected outcomes. These experiments
provide a profit opportunity for both manipulating and non-manipulating
users. In addition to manipulators’ potential profits, non-manipulating
users will be provided arbitrage opportunities by driving the prices
back to their expected outcome. Later experiments will test the ability
for prediction markets to be used for Futarchy.

Our first experiment will begin in the next few weeks and will test
manipulators ability to push a market which will verifiably resolve to 5
above this value. These initial experiments will gauge how easy (or
hard) it is for a group of participants with special interests (in this
case the manipulation token holders) to manipulate a market in order to
sway the decision of an oracle. There are two primary cases in which
such manipulation may be used: futarchy markets (or other processes) for
organization decision, and oracle processes which involve markets to
determine oracle outcome. In each case, groups may have a direct
monetary incentive to change market outcomes.

This experiment will consist of three components:

10,000 manipulation shares will be auctioned in 1,000 share chunks over a 3 day period.
A smart contract coded to return 5. This will be used to resolve the market.
A scalar market with the range (0,10) which will run for one week.

We will begin with the auction of 10,000 manipulation shares. These
shares will be sold in 1,000 share chunks. Following the markets
closure, these shares will be redeemable for between 0 and 0.1 Eth
depending upon the average value of the prediction market shares. This
redemption value will be calculated by ((avg market value) — 5)/50. For
example, if the market price remains at 5 for the entire period these
shares will redeem for 0 and if the market remains at 10 for the entire
period, they will redeem for 0.1. Redemption value will be calculated
proportionally between these prices. At this time we will also submit
the resolution contract for review.

Three days following this, we will launch the market on Gnosis. This
will be a scalar market with a range of (0,10). This market will be
resolved by the contract which will verifiably return 5. Everyone is
open and encouraged to participate in this market. Whenever the market
value is above 5 there is a guaranteed profit opportunity for users who
have not purchased manipulation shares. Following market resolution,
manipulation shares will be redeemable calculated by the average value
over the market’s duration.

Expect a post here in the next few weeks announcing experiment dates!

TL;DR:

Gnosis Prediction Market experiments testing market manipulation and Futarchy, funded by Ethereum DEV grant
First experiment, market resolves to 5, manipulators push market above 5 for profit. Other users profit by pushing back to 5.
Begins in the next few weeks