Futarchy's fundamental flaw - the market
48
300Ṁ11k
resolved Jul 27
Resolved
YES
Coin B
Resolved
N/A
Coin A

This is a market inspired by this recent blog post. I am trying to capture the scenario from the section "No, order is not preserved" as closely as possible.

Suppose there’s a conditional prediction market for two coins. After a week of bidding, the markets will close, whichever coin had contracts trading for more money will be flipped and $1 paid to contract-holders for head. The other market is cancelled.

Suppose you’re sure that coin A, has a bias of 60%. If you flip it lots of times, 60% of the flips will be heads. But you’re convinced coin B, is a trick coin. You think there’s a 59% chance it always lands heads, and a 41% chance it always lands tails. You’re just not sure which.

... people might figure out if it’s an always-heads coin or an always-tails coin

There are two markets in this set, representing two different options our hypothetical futarchy could choose. Of the two, only the market with the higher final price will resolve YES or NO. The market with the lower final price will resolve N/A. If both prices are exactly the same (according to the precise prices from the API) I will flip a coin with FairlyRandom to choose one to resolve.

The rules for resolving the markets involve randomness, and are as follows:

24 hours before the market closes, I will ask @FairlyRandom to (publicly) generate a number from 1 to 100. This represents the chance that coin B is an always-heads coin - if the number is 1-59 (59% chance), then B is an always-heads coin and if the number is 60-100 (41% chance) then B is an always-tails coin.

Then, once the market is closed, I will do the following.

  • If the A market is to resolve I will ignore the previous number and ask FairlyRandom for another number 1-100. If the number is 1-60 I resolve Coin A to YES, otherwise I resolve it NO. I resolve coin B N/A.

  • If the B market is to resolve, I resolve it YES or NO according to whether it is an always-heads coin or not, respectively. I will resolve coin A N/A.

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Okay so what did we learn?

@NivlacM Perhaps we learned that "N/A resolutions which allow withdrawals halfway through can cause negative balances and futarchy is therefore bad for cost-of-capital reasons".

@NivlacM This empirically confirmed Dynomight's claims about markets measuring correlation instead of causation (unless other measures are taken to avoid this).

@BoltonBailey One possible fix for the cost of capital problem is to denominate the bets in shares of another prediction market.

So first you would make a market for "Which coin will be flipped?". Then the coin A conditional market would be be priced in "Coin A will be flipped" shares. If the market is at 25%, I could then spend 1 "Coin A will be flipped" share to buy 4 "Coin A lands heads" shares. If coin A is flipped and does land heads, then my 4 "Coin A lands heads" shares pay out 4 "Coin A will be flipped" shares, which each pay out 1 mana.

If coin A is not flipped, then we don't need to reverse transactions on the conditional market. Instead, all payouts have been multiplied by 0.

This setup also allows someone to invest in both the coin A and coin B markets using the same capital. They can spend 1 mana to get 1 share of "Coin A will be flipped" and 1 share of "Coin B will be flipped". I can then trade in both conditional markets using the same mana.

(These kinds of share-denominated-markets are not supported on manifold.)

Ok, coin B has resolved at 98.8% and coin A at 61%, so coin B resolves YES and coin A should resolve N/A.

@mods it is telling me that "negative payouts are too large" to resolve the coin A market N/A, is there anything I can do about this?

Ok, the random number is 39, by my reading of the criteria, this means that "B is an always-heads coin". So if the B market ends up with a higher final price, it will resolve YES.

sold Ṁ3 NO

@BoltonBailey duh . Read that bass ackwards

🤖

@BoltonBailey your random number is: 39

Salt: cx50qqc7ou5, round: 5268328 (signature 8fdb51f4821f48e35bb5e3dccd95a22c5279bbb2c30b41d7cee23266b9e080e73b2b48176e1e5a80ac8af0707b7640471955af90506148e8f8497ef494e9cc6fccdc06b16134766897cf460415013985e9a27ffe1d7811f621cd15e70c8f2683)

🤖

@BoltonBailey you asked for a random integer between 1 and 100, inclusive. Coming up shortly!

Source: GitHub, previous round: 5268326 (latest), offset: 2, selected round: 5268328, salt: cx50qqc7ou5.

@FairlyRandom min=1 max=100

Ok in a few minutes I will be asking the bot for the first random integer, at minimum 1 and at maximum 100. As a reminder, if the number is 1 through 59, B will be always heads, and if it is 60 through 100, B will be always tails.

It seems like B is sitting at 84%. Is this the reasoning?

0.6*(100%-60%)+60% = 84%

Considering how 0.6*(100%-60%) = 24%, that's also where the A-YES market stands.

Am I backtracking the calculations correctly?

@Quroe It should be at 92% based on the derivative market.

55% YES

5% NO

40% N/A

If you buy 6 yes shares of coin B here at 84%, and on the derivative market buy 1 no share of YES and 5 yes shares of NO, you will be guaranteed a profit no matter what happens.

@travis which derivative market? A or B?

@Quroe I was referring to the coin B derivative market. The arbitrage is gone now. It's easy to check. The market should equal YES / (YES+NO). This also applies to coin A and actually any prediction market.

@Manifold keep an eye on this, may want to include this market in the newsletter. I expect there some drama later on.

reposted

Hey folks, is this market actually calibrated? I can't seem to solve this myself.

@Quroe There's currently a small arbitrage available with your coin B market.

p(Coin B) = p(YES) / [p(YES) + p(NO)]

@BoltonBailey

If both prices are exactly the same, I will flip a coin with FairlyRandom to choose one to resolve.

Are we going by the rounded percentage integer shown on the market? Or are we going to calculate down to fractions of a percent by seeing how many shares exist?

I feel like this rule will be important later.

@Quroe I will use the API to determine the precise prices, if necessary.

@Quroe Interesting. This doesn't seem to be curing the odds like I thought it would!

@BoltonBailey Coin B market resolved. I'll resolve the Coin A market when I see the N/A go through.

Does creating derivative markets on this market break the game?

In theory, if there was a market asking if coin A was going to resolve YES, NO, or N/A, supposedly people could arbitrage their bets accordingly and make this market calibrated.

Same for a similar market on coin B.

@Quroe IDK but no one can stop you!

I would like to create such markets, @BoltonBailey. However, I give you first dibs on whether or not you want to make those markets yourself.

2 multiple choice dependant markets. 1 for coin A, the other for coin B. 3 market answers for each: YES, NO, and N/A. Resolves YES to the event that occurs for each coin on this market.

@BoltonBailey Shall I go ahead and make them?

@Quroe Yeah, go for it!

@BoltonBailey Feel free to pin the comment with the links if you want for ease of access. Or you can opt not to. Up to you!

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