Constitutional Rights of a Dumb Contract
On Regulation of Prediction Markets
It could be the title of a novel by Pirandello: “Constitutional Rights of a Dumb Contract.” And after dusting off my novelist cap, I could be its author. But since I became a student of the blockchain, I have no time any longer for book writing. Today I’ll limit myself to giving you the abstract, hoping my friends Martin Köppelmann (who years ago introduced me to the notion of prediction markets), and Kathleen and Arthur Brietman (who lead the most vibrant crypto-community ever) will ponder it.
One of the benefits from becoming an American citizen is that in the process one discovers the beauty and power of the Law. For people born in the States it is hard to believe it, but contrary to many Western (and most non-Western) countries, it is an extraordinary fact that the American law is designed and conceived to protect our rights. In my country of origin, one is taught to dodge the law, rather than use it.
My point being that in the USA even my prediction market contracts, be they smart or dumb, have rights.
The 2014 Supreme Court’s decision on Citizens United vs. Federal Election Commission states that corporations are people. The 2014 decision in Burwell vs. Hobby Lobby Stores extends the idea that corporations are people from campaign finance law into the sphere of religious liberty. It is high time we lobby for a further extension of this idea to prediction markets.
My point being that crypto-anarchism has been a fun trip (I was a blockchainer long before the Department of Justice started paying attention to Mr. Charlie Shrem), yet the time has come to start playing politics — the Washington brand included.
With its gathering and expression of collective wisdom, the prediction market is no less a speaker than corporations and religious organizations; it advances social and utilitarian goals no less than the latter two, its predictions display to an undeniable extent the truth-seeking function that is promoted and protected by the First Amendment.
Robin Hanson is right, it goes more or less this way: we vote on value and act on belief. I voted for Hilary but knew that Trump would win. Had I been a builder, you’d have caught me, while still in the voting booth, either designing Trump’s Big Wall or strategizing on the best ways to take over the markets left unguarded by competitors distracted by the Big Wall. Values still count, Hanson’s futarchy doesn’t make us value-agnostic.
Hanson’s futarchy is informed by a dramatically broader application (from securities to ideas) of the mathematical apparatus of option trading (to which, incidentally, Einstein gave a fundamental contribution in 1905). The future of virtually everything matters; everything has a market value, if I can predict its future state. If I predict the future state of an election and help either wall builders or undocumented workers make a winning strategy (the latter would be hedging against the outcome), of course I deserve a reward.
What do the forthcoming blockchain-hinged prediction markets look like? How are they going to work? If I look closer to Martin’s Gnosis (but there is Augur too, and at some moment in the future, as we heard from Kathleen “breitwoman”, Tezos), it works more or less like this.
I can invest 10 GNO on the USA presidential elections. In return for freezing those tokens (let’s use this neutral term, tokens), I am given 10 contracts saying that Trump will win and 10 contracts saying that Hilary will win. In my book, the former are smart contracts (even if, based on values, I’ll vote for Hilary), the later are dumb contracts. I sell the dumb contracts (to buyers who see smart contracts in them) and keep the smart one.
In doing this, I am exercising a twofold form of free speech. I contribute to gathering the collective wisdom that Trump will win by refusing to be financially damaged by the opposite opinion, the one promoted by my ten dumb contracts. The way I shuffle my twenty contracts affects the present state of the prediction. I will vote for Hilary, but it is in my financial interest, and therefore one of my citizen’s rights, to act according to what I think will really happen. By doing this, I enhance my fellow citizens’ right and need to foresee the future and prepare for [hedge against] it).
And even if I lie and hodl the dumb contracts in the attempt to affect the final result (it is my right too), the market will correct my lie by arbitrage: I’ll lose both the election and my tokens.
The most aggressive agency seeking to regulate prediction markets is the Commodity Futures Trading Commission (CFTC). But in this case, aggression doesn’t necessarily bespeak ill intention or bad outcome. In fact, according to Miriam Cherry and Robert Rogers, inspirers of this piece of mine (See their “Prediction Markets and the First Amendment”), it’s to be hoped that full jurisdiction on prediction markets will go to the CFTC. The alternative would consist in prediction market being regulated via the 2006 Unlawful Internet Gambling Enforcement Act. In this latter case, blockchain-based prediction markets might end up being banned from the USA. But in the light of what I wrote above, it seems evident to me that only a deliberately narrow view of prediction markets would justify the identification of prediction with gambling.
Rather, participation in a prediction market could be more legitimately equated with contribution to the op-ed page of the New York Times (an idea as well of Cherry and Rogers). In both cases, one manifests an opinion, usually based on forecast. In both cases, there is the prospect of a payout; in the NYT case, the payout is sure, whether or not the editorialist is correct in his/her opinion (let’s be crypto-anarchists a moment longer and say it: most of the time s/he is wrong); in the prediction market case, the payout is uncertain, depending mostly on one’s skills at gathering correct predictive information before making one’s move.
A piece of anecdotal evidence. In a 2005 case, the CFTC asserted jurisdiction over an Irish company, Tradesports, which ran prediction market and sports betting. The case was settled with the payment of a civil monetary penalty and the delisting of markets, such as gold futures and daily crudes, that duplicated, unlicensed, commodity option trading. The other predictive-event markets run by Tradesports, and based on futural knowledge and information, were left alone.
I find the expression “to put one’s money where one’s mouth is” distasteful. So, I won’t use it. (It’s not just a matter of flavor. Rather, as I wrote somewhere else, I believe that we blockchainers are in it for the social mission first of all, and for desirable personal gain second of all. It’s the taste of freedom from an unfair past we like.) In futarchistic fashion, however, having praised both the American Constitution and prediction markets, having predicted their peaceful coexistence — having in other words declared both my values and my beliefs — I’ll make my move.
In recent months I acquired a small stash of GNO, REP, and XTZ. To me, there isn’t a single dumb contract among them. I am a hodler. And that’s my long-term move.
Thanks for reading. As usual, this is me in public keys (to pay for my student fees at the University of York — or to increase my stash, whatever):