If Earth builds its prediction market on the blockchain then other parties could create derivative smart contracts to evade Earth’s restrictions. Earth would have to limit prediction market trading to its domain of territorial influence and carefully monitor all of the traders’ financial dealings, which would weaken the power of the prediction market.
I thought the whole blockchain point was just a funny story, not some serious proposal? Outside of dodging regulations, I don’t really see the reason why you’d have a blockchain-based prediction market. It seems like it would be much easier to just store it in a big database.
As for the issue of limiting trading, if you are running the prediction market on your own servers with your own code, it would be trivial to prevent participants to trade with each other, simply by not implementing it or anything that can be used for it (like exchanges of contracts). This would also seem to prevent setting up derivative contracts because people have no way of enforcing them.
The Earth/Mars/Ceres stuff was for a fun story (and to keep the example grounded while avoiding unnecessary real-world politics) but the blockchain is an important ingredient. The blockchain is not there to dodge regulation. Earth doesn’t need to dodge regulations. It is a sovereign state. Earth writes the regulations. It can do whatever it wants, legally-speaking.
The purpose of using a blockchain is precisely to commit Earth into not doing the shenanigans you propose. If Earth plans to interfere with the prediction market then you no longer have a free (as in markets) prediction market.
There are ways of implementing contracts based off of Earth’s market without a blockchain (especially if Earth’s prediction market prices are public knowledge) but they are messy. Using a blockchain keeps the thought experiment simpler by allowing arbitragers to just program derivative smart contracts.
The purpose of using a blockchain is precisely to commit Earth into not doing the shenanigans you propose. If Earth plans to interfere with the prediction market then you no longer have a free (as in markets) prediction market.
But why not just do the shenanigans I propose?
Also it doesn’t seem like it’s reasonable to call them interference. It’s not that Earth changes the payouts or anything. It just limits the trading.
There are ways of implementing contracts based off of Earth’s market without a blockchain (especially if Earth’s prediction market prices are public knowledge) but they are messy. Using a blockchain keeps the thought experiment simpler by allowing arbitragers to just program derivative smart contracts.
Wouldn’t these require basically setting up a separate prediction market? Which would mean that your enemies are not using your market, but are instead using this separate market.
If Earth had a totally insulated economy (like North Korea) then you could do it. Otherwise, your shenanigans amount to banning your traders from hedging their risks. Prediction markets work because people arbitrage away risk. Arbitrage and hedging are two sides of the same coin. (See the Chapter 5 of this book for a precise mathematical formulation.)
To put the situation another way, it would do no good for Earth to just ban traders from hedging away the risk on the Earth servers. Earth would have to ban traders from hedging away their risk on all markets, period. That implies you’re insulating Earth’s prediction market from the rest of the Solar System’s economy—and you can’t do that while incentivizing experts to use the prediction market via profits exchangeable for interplanetary Dogecoin.
Wouldn’t these require basically setting up a separate prediction market? Which would mean that your enemies are not using your market, but are instead using this separate market.
Doesn’t matter. The separate prediction market is funded indirectly by the liquidity provided by the first prediction market. The separation of markets is just a legal cover.
Doesn’t matter. The separate prediction market is funded indirectly by the liquidity provided by the first prediction market. The separation of markets is just a legal cover.
Just so I understand: What you have in mind is something like the following?
Earth creates a prediction market, betting hard that Ceres is going to have a coup
Mars creates a corresponding prediction market, without betting anything
Some trader, who I’ll call Ivan, offers a bet that Ceres is going to have a coup on Mars’s market
If anyone takes him up on it, Ivan will buy a corresponding contract from Earth’s market, pocketing a small profit and eliminating all risk from his perspective
This generates liquidity in Mars’s market, about as much liquidity as there is on Earth’s market
And I guess I understand you so far. What happens then? Is it something like:
Initially, maybe the Earth/Mars relations are rather cold, so nobody expects a coup; therefore they bet it all the way up to 95% probability that there will be no coup.
But this now creates a strong incentive to make new bets that Ceres is going to have a coup and then make Ceres have that coup, e.g. Hook the Space Pirate sell contracts in the Martian market and then start a coup on Ceres.
I feel like at least this point of your original post fails though:
But even if hiring marines is technically cheaper, operating through the prediction market provides a level of deniability overt operations lack. After all, Mars’ enthusiastic participation in a blockchain prediction market created by Earth can hardly be considered a breach of the peace.
If Earth builds its prediction market on the blockchain then other parties could create derivative smart contracts to evade Earth’s restrictions. Earth would have to limit prediction market trading to its domain of territorial influence and carefully monitor all of the traders’ financial dealings, which would weaken the power of the prediction market.
I thought the whole blockchain point was just a funny story, not some serious proposal? Outside of dodging regulations, I don’t really see the reason why you’d have a blockchain-based prediction market. It seems like it would be much easier to just store it in a big database.
As for the issue of limiting trading, if you are running the prediction market on your own servers with your own code, it would be trivial to prevent participants to trade with each other, simply by not implementing it or anything that can be used for it (like exchanges of contracts). This would also seem to prevent setting up derivative contracts because people have no way of enforcing them.
The Earth/Mars/Ceres stuff was for a fun story (and to keep the example grounded while avoiding unnecessary real-world politics) but the blockchain is an important ingredient. The blockchain is not there to dodge regulation. Earth doesn’t need to dodge regulations. It is a sovereign state. Earth writes the regulations. It can do whatever it wants, legally-speaking.
The purpose of using a blockchain is precisely to commit Earth into not doing the shenanigans you propose. If Earth plans to interfere with the prediction market then you no longer have a free (as in markets) prediction market.
There are ways of implementing contracts based off of Earth’s market without a blockchain (especially if Earth’s prediction market prices are public knowledge) but they are messy. Using a blockchain keeps the thought experiment simpler by allowing arbitragers to just program derivative smart contracts.
But why not just do the shenanigans I propose?
Also it doesn’t seem like it’s reasonable to call them interference. It’s not that Earth changes the payouts or anything. It just limits the trading.
Wouldn’t these require basically setting up a separate prediction market? Which would mean that your enemies are not using your market, but are instead using this separate market.
If Earth had a totally insulated economy (like North Korea) then you could do it. Otherwise, your shenanigans amount to banning your traders from hedging their risks. Prediction markets work because people arbitrage away risk. Arbitrage and hedging are two sides of the same coin. (See the Chapter 5 of this book for a precise mathematical formulation.)
To put the situation another way, it would do no good for Earth to just ban traders from hedging away the risk on the Earth servers. Earth would have to ban traders from hedging away their risk on all markets, period. That implies you’re insulating Earth’s prediction market from the rest of the Solar System’s economy—and you can’t do that while incentivizing experts to use the prediction market via profits exchangeable for interplanetary Dogecoin.
Doesn’t matter. The separate prediction market is funded indirectly by the liquidity provided by the first prediction market. The separation of markets is just a legal cover.
This sounds wrong. Prediction markets work because you run them with generous subsidies to incentivize participation; risk-based arbitrage is not a recommended way to fund the markets.
Just so I understand: What you have in mind is something like the following?
Earth creates a prediction market, betting hard that Ceres is going to have a coup
Mars creates a corresponding prediction market, without betting anything
Some trader, who I’ll call Ivan, offers a bet that Ceres is going to have a coup on Mars’s market
If anyone takes him up on it, Ivan will buy a corresponding contract from Earth’s market, pocketing a small profit and eliminating all risk from his perspective
This generates liquidity in Mars’s market, about as much liquidity as there is on Earth’s market
And I guess I understand you so far. What happens then? Is it something like:
Initially, maybe the Earth/Mars relations are rather cold, so nobody expects a coup; therefore they bet it all the way up to 95% probability that there will be no coup.
But this now creates a strong incentive to make new bets that Ceres is going to have a coup and then make Ceres have that coup, e.g. Hook the Space Pirate sell contracts in the Martian market and then start a coup on Ceres.
I feel like at least this point of your original post fails though: