Decentralized Prediction Market without Arbiters
This addresses the need for trustless and accessible prediction markets for participants who are distrustful or seek anonymity, though it is incremental in building on existing cryptocurrency concepts.
The paper tackles the problem of creating a decentralized prediction market without trusted arbiters by using an enhanced cryptocurrency approach, resulting in a system that can handle unresolved events and facilitate anonymous, geographically dispersed trading.
We consider a prediction market in which all aspects are controlled by market forces, in particular the correct outcomes of events are decided by the market itself rather than by trusted arbiters. This kind of a decentralized prediction market can sustain betting on events whose outcome may remain unresolved for a long or even unlimited time period, and can facilitate trades among participants who are spread across diverse geographical locations, may wish to remain anonymous and/or avoid burdensome identification procedures, and are distrustful of each other. We describe how a cryptocurrency such as Bitcoin can be enhanced to accommodate a truly decentralized prediction market, by employing an innovative variant of the Colored Coins concept. We examine the game-theoretic properties of our design, and offer extensions that enable other financial instruments as well as real-time exchange.