An Introduction to Cryptoeconomics and Futarchy experiments on Gnosis

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:

  1. 10,000 manipulation shares will be auctioned in 1,000 share chunks over a 3 day period.
  2. A smart contract coded to return 5. This will be used to resolve the market.
  3. 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, and please visit our forum at http://forum.groupgnosis.com/ for more discussion!

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