Introducing Predictions by Hodl Hodl

Today Hodl Hodl is formally announcing our new product called “Predictions” about to be released this spring. In this blog post we would like to explain what it is, why we think it can become a very useful financial instrument in the Bitcoin ecosystem and how you personally may employ it.

Prediction markets are not necessarily something new, but to this point we haven’t seen their widespread use. Augur project, for example, has a working prediction market, albeit it only works on Ethereum and it has an oracle problem too. If you don’t understand any of those words, let us start from the beginning and explain.

A Prediction market is essentially a marketplace where you can go to and create a contract with someone else where the conditions of the payout depend on an outcome of a certain event. In the simplest case you can create a contract with another person, where you claim that the price of Bitcoin is going to be above $5000 by May 2019. The other party may disagree with you on that. The condition of the contract states that each one of you lock 1 BTC into escrow and whoever turns out to be correct in the prediction on the price of Bitcoin, gets 2 BTC in May.

The “oracle” in this case is supposed to be a person or an entity that ultimately decides which outcome is true and rewards the party that was correct. However we at Hodl Hodl devised a much more interesting scheme, where because each party would lock funds in multisig 2-out-of-3 escrow, the oracle in this case is going to be sort of distributed: in a perfect case, both parties agree on the outcome, because neither party is able to return the coins locked in escrow unilaterally and, thus, they have nothing to win whatsoever by denying the outcome in favor of the other party. In fact, they risk losing their reputation on Hodl Hodl and future prospects for creating contracts.

But even in case of a dispute, Hodl Hodl leaves a chance of interference with its third key, which can be used to sign the transaction in favor of the party, who guessed the outcome. Best part of it is that Hodl Hodl, as always, doesn’t have direct access to the funds and is not actually in possession of bitcoins at any moment. Thus, the prediction market implementation we came up with can be called “a peer-to-peer” prediction market.

The important notion here is that of course, you’re not limited to contracts that predict Bitcoin price. You can employ this tool for various things. For instance, if you’re a MtGox creditor (a Bitcoin exchange that was hacked and went bankrupt back in 2014) and awaiting the payout, you might be interested in creating a contract that says “creditors of MtGox will not be paid anything in 2019” even though your expectation is that they will be. Thus, you’d be hedging your risks: if you get paid by MtGox, you receive bitcoins from them, but lose the ones you locked with your contract. If you don’t get paid by MtGox, you’d get some of the bitcoins that will be sort of a compensation for a longer wait period.

As you can see, the contract may have any sort of conditions based on many different events (elections outcome, price of oil or other assets or even weather). Hodl Hodl, however, will make sure of two things:

  1. Conditions do not contain anything illegal
  2. Conditions are not ambiguous

We’ll have every offer pre-moderated. Once an offer is approved anyone will be able to create a contract with you based on your offer.

The interesting part about offers, is that you can specify the following things:

  1. Odds. You can say that you want your counterparty to create a contract with you with odds of 1 to 10, which means you’ll be locking 1 BTC, while your counterparty must lock 10 BTC.
  2. Minimum contract volume and offer balance. Not everyone is able to take on your offer in full. Maybe someone is prepared to take on it with 5 BTC. In that case you’ll be locking 0.5 BTC and waiting for someone else to create another contract for 0.5 / 5 BTC. At the same time, you can specify minimum contract volume, so people don’t create offers for ridiculously small amounts and waste your time.

All in all, we at Hodl Hodl believe this will be a perfect and long awaited instrument for the ecosystem. We especially want to point out that this is not gambling: gambling is generally an activity that involves instant gratification expectation, fast execution and randomness. Prediction market we’re working on is nothing like that: it emphasizes low-time preference, financial planning and responsibility. And of course, the bitcoins are locked in multisig-escrow, which is orders of magnitude safer than keeping money on centralized exchanges.

We hope to see this tool help people achieve greater financial security without resorting to the old financial system instruments. We’re looking forward to the release and you can subscribe to our email list to be notified when we launch predictions.