Empiricism Done Right: “The Truth Behind Truthcoin”

“Some people say money is the root of all evil. Others say its a necessary evil. Most can agree that it’s an important human innovation.

But it hasn’t been widely acknowledged that the human desire for money can actually be used to peer into the future.

A Prediction Market (PM) is a place where people can bet on the outcome of an event. If they guess correctly, they win money. If they guess incorrectly, they lose money.

People care about their money, so the market price of an event gives us a good answer to the question “Will this outcome happen or not?”

It’s not magic. It’s the economics version of the “wisdom of the crowd”.

Intrade became the first provider of this form of market online. It was closed downlast year.

Paul Sztorc has begun to develop Truthcoin, a prediction market based on the blockchain.

Part 1 of Paul’s 5 part introduction to prediction markets highlights some of the problems of traditional Prediction Markets:

“There are several problems with PM’s: mainly the fact that when persuading others of something complex, [people tend] to highlight true statements when they support their own argument, and hide them away when they support an alternative argument.

[Also], If you make a bet with someone, you have to trust them to pay up. Tradable-Predictions, defined as “assets with a definite future value based solely on their future accuracy” have never existed. Instead, the value of PM-Predictions depended substantially on the behavior of the counterparty (ie, the guy holding the money). You can’t “own” a prediction, only a paper claim to money held by the PM administrator. The PM administrator has proven to be unambitious at best (accepting only a few bet-topics) and unreliable at worst (losing funds and/or going out of business, see Appendix). PM-admins rely on trust (as they hold their customer’s money) yet are prevented from accessing trust-forming institutions (law-enforcement, brands/advertising) because of their regulatory/legal/awareness challenges.”

He goes on to say:

“Bitcoin operates independently of a nation’s legal framework, and might avoid closure or regulatory interference. If so, competing “Bitcoin InTrades” would appear to fulfill market demand. Unfortunately, PMs require a way to store up money and pay it out based on a real world outcome, which implies trusting a third-party with your money. Use of supra-national Bitcoin would prevent the use of any legal guarantee (to justify this trust).”

Bitcoin demonstrates that a blockchain can provide scalable, censorship-resistant, and trustless solutions to value-transfer problems. Blockchain solutions also generate efficiency by cutting out middlemen and avoiding overhead costs (no brick-and-mortar, compliance, administration, etc.). They are egalitarian and immortal. “

Paul expanded on these ideas and told me a little more about himself by answering these questions I had for him.

What is Truthcoin?

A marketplace for the creation and trading of ‘event derivatives’, which have a final value based only on the-state-of-the-world (such as election results or stock prices) and nothing else.

Truthcoin’s markets might resemble “smart contracts”, where the focus is not on “performing the math calculation of the contract”, but instead on “getting accurate reports from people”. Where a user would ask Ethereum to solve an equation using some algorithm, a user might ask Truthcoin to honestly-uncover “what was the solution to that equation” from users. Although users would be free to lie about what that solution was, an incentive mechanism discourages this. The emphasis is on “the solution itself”, not on “the process of solving”.

How was it formed?

InTrade.com was possibly my favorite website on the internet, but, tragically, it was forced to close for a variety of reasons. I felt that the closure of InTrade resembled the closure of Liberty Dollar and e-gold. Just as the latter inspired Bitcoin, the former inspired me to try to do something similar for Prediction Markets. I thought about it for a while, and wrote down some code and a whitepaper at the beginning of this year.

What is your professional background?

I double-majored in Economics and Psychology (undergrad) and then dual-degreed (graduate) in Operations and Finance at CWRU. I’ve worked at Interactive Brokers and GE/NBC in technical/programming roles, worked on Six Sigma operations consulting, and Healthcare IT consulting. I currently work as a ‘Statistician’ or ‘Visiting Scholar’ doing grant-supported research (unrelated to Truthcoin) at the Yale Department of Economics.

What are you currently busy with?

Currently, a few people want to raise money for Truthcoin, or work as volunteers. Figuring out who is a good fit, exactly what I can reasonably promise to investors, what I should do with people who have already put in work, who I can trust to do a good job, and how to reward all of those people, are questions that consume my time. I also have a communication problem where most people (despite the whitepaper and code) don’t “get” the project. Right now I would like to make more demos, slides, infographics or videos.

What is your vision for Truthcoin?

The short term dream would be that people who know C++ Bitcoin very well would find Truthcoin, decide how to combine the pieces (the existing Bitcoin code + the new parts which I’ve coded), and help me release and maintain a version for discussion.

The medium term dream would be widespread discussion of the costs and benefits of the core idea. Can the risks be mitigated (with sidechains/treechains, some kind of firewall, a multi-round test process)? Are the benefits substantial? Ideally, this would lead to the question: do enough people feel that it is sufficiently-valuable to actually switch from Bitcoin to this (or transform Bitcoin into this)? Currently, few have discovered Truthcoin at all, so such an ambitious question can’t even be asked.

The long term dream is nothing short of a second Scientific Revolution restoring the virtue of empiricism to the public discourse. A world with optimally-accurate forecasts (“Will X be a problem in the future?”), optimal advice (“Which of X would produce more Y?”), stable-value cryptoassets (“BitUSD”), a world where CEOs and politicians have to work competitively for a living, where organizations of all kinds are unable to lie to the public, where smart contracts are widely available, where Public Goods can be financed quickly and at low cost, and where anyone with an internet connection has access to the combined intellectual powers of all mankind.”


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