The Case for Decentralization
Gnosis is the first decentralized prediction market. All financial logic operates on the Ethereum public network. There are no central intermediaries holding funds or calculating pricing. Shares in markets are held directly by a user’s personal wallet and are also directly redeemed to their wallet.
So why do we make such an effort to decentralize?
Counterparty Risk
Typically to participate in a prediction market, or another similar market, a user sends some amount of currency to the site operator (Intrade, Betfair, Poloniex). These funds are then held by a wallet owned by the site operator, and the equivalent value is credited to the user’s account via a database entry. This process places risk upon both the site operator and the user. The site operator must now hold and be responsible for securing customer funds. If a hack or other hazard occurs, the site is responsible and may be sued. On the other hand, the user needs to trust that several events will not happen, including theft by the site or from the site, legal intervention, and payment processors restricting withdrawal capacity. These are significant considerations, especially taking into account that these issues have occurred with regularity. From a market perspective, this means decreased liquidity as users factor in the risk of fund loss.
Gnosis, through decentralization and automation of fund holdings and share issuance, provides a solution to these hazards. Unused funds always reside in the user’s control. Users own the account and hold the private keys. No one else can move their funds, and they are able to move their funds even if Gnosis goes down. Funds which have already been used to purchase shares in markets are held in automated smart contracts, which are incorruptible by humans, and designed to verifiably pay out correct values upon event resolution. Our model removes the burden from the site operator (in our case, the Gnosis DApp or apps building on top), and removes the user’s exposure to counterparty risk. This decreased risk and increased confidence will result in greater market liquidity.
Access
One of the most severe impediments to widespread prediction market adoption is access limitations. Laws regulating prediction market usage and operation are often unclear, and vary wildly from jurisdiction to jurisdiction. This results in unique applications for each location, which siloes liquidity. Many locations have no access at all.
By decentralizing, Gnosis has the ability to be location agnostic. Gnosis can be accessed anywhere. Furthermore, anyone accessing Gnosis, regardless of location, has access to the same markets, pricing, and liquidity that anyone in any other location would have. This results not only in increased adoption capacity, but also in greater information aggregation. For example, take a market on the weather in China. Researchers in the UK may have an excellent weather model, and access to a prediction market to sell their information, however that market would likely only be accessible in the UK. On the other side of the world, locals in the region may have more fine grained current or historical weather data. With Gnosis, both groups can access the same markets, adding more unique information to the markets and thus resulting in better probability estimates and pricing.
Coordination
Gnosis is built as a platform, and as such, its success is partially dependent on other parties building applications on top. In order to ensure this occurs, trust issues must be tackled. The first can be categorized as platform to application trust. In this case, an application wants to build on an existing platform, however there is risk that the platform may change usage rules. For example, an application building on Facebook may be wholly dependent on Facebook continuing to share a certain data parameter. If Facebook changes its policy, which it could on a whim, that application operator would be out of business. To solve this problem, applications need guarantees at the platform level that usage properties will remain the same (or predictable). With a decentralized, smart contract platform we do exactly that. Platform rules are hard coded into the software and are publicly viewable and verifiable. Additionally, high level operation changes could potentially include a decentralized governance layer, adding transparency and fairness for all participants. The second trust issue is application-to-application, where the two applications may be competing. By enabling a global and universally accessible liquidity pool, we provide a compelling argument for competitors to each operate on Gnosis. Added liquidity results in more accurate pricing, which is a primary value add for users.
