Can a prediction market based on blockchain help farmers protect their profit? Why do blockchain based prediction markets need an arbitration process? Here is what I learned from Bodhi network’s founder Xiahong Lin. (No technical background needed.)
What is the usual use of prediction markets?
“As a prediction market, we don’t make predictions for others. We provide a market or trading platform for people to make predictions,” Lin said.
A betting market is probably the most common use case for a prediction market. For example, I can bet on a team to win in a particular baseball game. If I bet on the right team, I can win some money, or else I lose the money I have deposited. But prediction markets are not only for betting.
With a prediction market, you can predict something you want to know, like the possibility of a certain outcome of a political election, or weather. This is based on a theory called Wisdom of the Crowd, which means the aggregated prediction result from enough of people can be more accurate than any expert’s prediction.
Photo by Chris Liverani on Unsplash
How can prediction markets hedge risks for farmers?
Farmers want to predict the weather or the rainfall for the year because it lets them know how many crops they can harvest, how much they should invest, and how much they can earn for the year.
“Say this year you planted crops. The harvest of this crop is related to the amount of rainfall. I know how much I invest in the planting this year? But the amount of rainfall, I have no idea,” Lin explained.
He then explained to me how prediction marketing can help the farmer hedge the risk.
“What if I invest and want to guarantee the harvest? I can spend extra money to bet on a bad weather or insufficient amount of rainfall. What would happen if the weather is actually good? I could have lost some money, but I got a large harvest. If it is really bad? You can hedge against those who predict a good weather. Even though your crop harvest is bad, but you are right in the forecast. You will be hedged by risk. This is very common in the financial derivatives, ” he explained.
Photo by Agence Producteurs Locaux Damien Kühn on Unsplash
Why blockchain?
Some of the blockchain platforms such as Ethereum have smart contract. The smart contract is an automatic program that can record the bet, check the result after the event, and then pay out the money. It is automatic, open, fast, and irreversible. Additionally, it is stored in many computers, so when it is operated, many computers have to reach a consensus to approve the transaction, making it very hard to cheat.
Usually prediction markets use Ethereum blockchain, but Bodhi uses Qtum from China, which is similar to Ethereum, and also a competitor. So I asked why Bodhi uses Qtum in stead of Ethereum. Lin told me that currently they target the Chinese market, and Qtum is more applicable to that, but they are looking to expend on a broader platform later.
It is interesting that Bodhi is targeting the Chinese market, but its HQ and main development base is here in Silicon Valley.
Why arbitration? Or dispute the result?
There are many prediction markets, such as Augur and Gnosis, that are based on blockchain technology. They all have some dispute process or arbitration. Why is this needed?
Let’s take the 2018 NBA Western Conference Final result as an example, if I want to check the result, I just Google it. ESPN will tell me the Warriors won the western conference final. If I check other channels, they will give me the same result. I will not dispute it; it is a fact, and everybody agrees. Why would I dispute on a fact?
“In Blockchain, there is no centralized node to set the result. Even if there is one, you cannot believe it because it could be hacked, or there might be malicious manipulation etc. A centralized system always have that problem. Even it has worked for hundreds of years, you cannot trust it. And this is what blockchain is trying to solve,” Lin explained.
Lin told me how evil hackers can use the loopholes in centralized data providers to make money by just changing the result of the bet for even a short period of time.
Lin went on, “…99% or 99.999% the data can be reliable. But when a hacker sees this tiny possibility to earn huge amount of money, with altering the result for only a very short time, what will the hacker do? This hacker will always vote for the wrong result, given many are voting for the right result. This hacker only needs to attack the “oracle” (this could be ESPN in my previous example), the third party data provider, he can easily get huge rewards.”
Due to the nature of Blockchain, if money or tokens got sent to an evil hacker, the money or the tokens will be gone.
“ In this world of Blockchain, once the transaction is done, it is done! The transaction cannot be retrieved, ” Lin added.
That is why the prediction markets all need an arbitration mechanism: to report the correct result in a reliable way.
Bodhi does it within 48 hours after the result is out. You can report any result, but one has to deposit some Bodhi coins. If you are honest and the result you posted align with the actual result, you will be rewarded. Otherwise, you lose all your deposit. Say you deposited 100 coins at the beginning. After the deposit, you will be judged by all the public. Based on the fact that the result is already known, the public can either do nothing if they agree with your result, or if they don’t agree, they can deposit more coins and to refute the previous result. But in order to start the refutation, you need to add 10% of coins from the last round. If last round the deposit was 100 coins, now you need 110 coins to start a new round. Then you have a temporary result. This process will be repeated until everyone agrees with the result.
This arbitration means, after the event, after the result is out, people can raise arbitration if they question the result. But they have to pay a price to start an arbitration. This way, the result will not be easily changed by a single malicious person. Even if they do, there are ways to revert that malicious act.
Here is my interview, just in case you are interested. However, it is in Chinese, so I wrote this article!
Note: No compensation received from any company for this article.