Introduction to types of prediction markets
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This post was made in the context of Futarchy discussions, with the tone of "it would be good to know this as prior knowledge." https://gyazo.com/d69565ad68502cf48a6f93efb00bd687
First, let's start with abstract concepts. It is recommended to have a basic understanding of these before reading the specific model explanations. Previous companies, interviews and appearances related to oneself.icon
Each type of prediction market must have the following elements:
1. A "question," "collateral token," and "two or more outcome tokens" are required.
2. In all cases, the collateral token can be exchanged for one outcome token, and the outcome token can be exchanged (returned) for the collateral token.
1. Categorical markets
These are markets where the outcome can be defined as "multiple choices."
(As described in Categorical markets have a set of possible outcomes in Previous companies, interviews and appearances related to oneself.icon") Specifically, they can be answered with "yes" or "no," or with names of candidates, for example.
"Will the groundhog see his shadow?"
── Outcome tokens: YES, NO
"Who will win the election?"
── Outcome tokens: ALICE, BOB, CINDY
2. Scalar markets
These are markets where you predict what will happen to a "specific value" by a target deadline.
The value will move within a specified range.
They have two outcome tokens.
At the deadline,
The upper bound token can be exchanged for the collateral token at (RESOLVED_VALUE - LOWER_BOUND) / (UPPER_BOUND - LOWER_BOUND).
This is also known as the "long token."
The lower bound token can be exchanged for the collateral token at (UPPER_BOUND - RESOLVED_VALUE) / (UPPER_BOUND - LOWER_BOUND).
This is also known as the "short token."
https://gyazo.com/7ec71450dff3624937133d3633b1f74b
Specific example: Predicting the "price of gold per oz at the beginning of 2019."
"What will the price of gold per oz be at the beginning of 2019?"
── Upper bound: $2,000
── Lower bound: $0
\s\s\s>When the market settles at $1,000 per ounce, the long tokens are worth 0.5 collateral tokens and the short tokens are worth 0.5 collateral tokens. It's intuitive because it's in the middle.\n\n\s\s\s>When the market settles at $1,500 per ounce, the long tokens are worth 0.75 collateral tokens and the short tokens are worth 0.25 collateral tokens. Here's the formula to explain it more explicitly tkgshn.icon*2:\n\s\s\s\s0.75 collateral tokens = (1500 - 0)/(2000-0)\n\s\s\s\s0.25 collateral tokens = (2000 - 1500)/(2000-0)\n\n\s3. Conditional Tokens (The Wisdom of Crowds (Kadokawa EPUB Selection) | James Surowiecki, Naoko Kodaka | Book | Mail order | Amazon website's explanation is easy to understand)