Does TruthCoin Solve A Problem?

By Ben Golden on September 28, 2015

I've been following the development of TruthCoin, a platform for decentralized prediction markets, for a while now. Prediction markets at their core are about crowdsourcing forecasts. At Cultivate Labs, we've also built a platform to crowdsource question authorship. TruthCoin goes one step further and crowdsources question resolution. That is, there's no central entity that determines whether an event occurred; it's done by a crowd of observers.

There's some skepticism that this approach will even work, but I'm more concerned with the question of whether it's necessary--I don't really understand the problem that TruthCoin solves. 

TruthCoin founder Paul Sztorc lists the following disadvantages of traditional prediction markets:

  • Historically, these businesses (InTrade) close down due to interference, public misunderstanding (betting taboo).
  • Which derivatives to create, and who creates them
And here's Augur, a TruthCoin implementation*, explaining why decentralization is necessary:
Historically, prediction markets have fallen short due to dated jurisdictional regulation, lack of volume due to limited payment options, a paltry number of markets, and sometimes even paying out the wrong people!
The root of these problems stems from centralization — an issue solved by blockchain technology. 

I find these to be striking claims, because they don't at all match my perception of the challenges facing prediction market projects, and in some cases they're demonstrably false:

  • InTrade didn't fail because of interference or public misunderstanding--while the CFTC certainly didn't help, it was shut down because its operators weren't following proper accounting practices (ie probably stealing money).
  • There are numerous examples of centralized prediction markets, many of them highly regulated, that are doing quite well: financial markets, the Iowa Electronic Markets, PredictIt, iPredict, Betfair, Smarkets.
  • In a small number of cases, resolving prediction market questions is legitimately difficult, and a couple times prediction markets have done so incorrectly, but I wouldn't consider this among the top problems prediction markets run into.  I'm also not clear on how decentralization helps solve this problem.

As an example, consider the following question: "Will Carly Fiorina be among the 10 candidates included in the top-tier CNN debate on Sep 16, 2015?" One can make the case that this question should resolve as true (because Fiorina was in the debate), as false (because there were 11 candidates, not 10), or as ambiguous (because either answer seems plausible). No matter who resolves the question (an individual arbitrator or the crowd), or how the question resolves, someone's going to believe that the wrong people got paid, or that the right people didn't get paid.

Ultimately, it seems like what TruthCoin is really trying to do is sidestep the legal and regulatory rules that prohibit real-money prediction markets from operating in the United States.  But combining law-breaking with cryptocurrency doesn't have a good track record, whether it's drug-dealing and murder, poker, or speculating on private companies.  BitCoin itself is in something of a legal gray area, since it's used for both licit and illicit purposes, but TruthCoin's only function seems to be enabling illegal activity.

Augur assures potential users that it's legal footing is solid:

We have examined legal precedents and case law, our legal advisory is world-class and we are being entirely transparent about what we are building. We have been, and are more than happy to continue, engaging in discussions with any interested parties, including regulatory authorites, about the software.

But then it's legal case seems pretty tenuous:

We also find that some laws, including those aimed at online gambling, do not contemplate a payment method like Bitcoin, thus placing many transactions in a legal gray area.

Following the approach to virtual currencies taken by the Financial Crimes Enforcement Network, we argue that other financial regulators should consider exempting or excluding certain financial transactions denominated in Bitcoin from the full scope of their regulations, much like private securities offerings and forward contracts are treated. We also suggest that to the extent that regulation and enforcement becomes more costly than its benefits, policymakers should consider and pursue strategies consistent with that new reality, such as efforts to encourage resilience and adaptation.

Essentially, Augur is hoping that regulators will be lenient towards a product whose backers see it as a means of breaking laws.

I may be missing something important, but my overall sense is that the choice to decentralize prediction markets is one that offers almost no benefits and very real costs.  I'll be excited if TruthCoin is successful in vastly expanding the prediction market landscape, but my bet is that it won't.  If its backers' objective is to actually arrive at truth, rather than enabling illegal gambling, I'd suggest the better approach is to support centralized prediction markets, including ones that use play money.

*: Augur and TruthCoin are now somewhat at odds--see here.

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Ben Golden/@BenGoldn is an Engineer at Cultivate Labs.

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