As the Bitcoin community struggles to reach an agreement on the block size, the shortfalls in the current consensus mechanism are becoming apparent with politics, community infighting and “whiny rage-quitting.” So how can the Bitcoin community know that the information available in the wild is accurate? Could prediction markets, i.e. Bitcoin futures, aid the decision-making process for the world’s first decentralized currency and help fix its “troll problem”?
‘Listen to the Market’
Online forums, social media, the press currently all serve as loudspeakers for the most opinionated and outspoken Bitcoiners. But this hardly paints the entire picture and results in some information being relegated if not censored, while other viewpoints get pushed to the forefront.
“All the controversy does is generate a huge amount of uncertainty, scaring away new entrants, as well as causing existing investors to reconsider the wisdom of their investment,” opines BitGo CTO Ben Davenport.
This, of course, is a valid point as the biggest aversions for any investor – or holder in Bitcoin’s case – is uncertainty and doubt. Users are understandably fearful of the risk that their coins will depreciate as holders sell in panic following a loss of confidence in their perceived value.
“[Miners] want to mine the coin which will provide them with the greatest return on their investment,” he writes. “The problem is, miners don’t have a price with which to make a decision.”
Davenport argues that a possible solution to the block size issue could be the introduction of a price discovery mechanism for miners so that they could choose to secure or “vote” for the most lucrative chain. This method would involve two different versions of a coin that will exist following a fork, where the holders can decide which to buy and sell. It would also grant voting abilities to the holders of bitcoin, albeit indirectly. However, the problem is that this could only work if the miners get a price signal before a fork actually occurs and these “futures” do not yet exist in the Bitcoin space.
Clearly, these assets cannot be delivered today, so what we’re talking about is a futures market or prediction market. Any Bitcoin exchange could theoretically make such a market.
Such blockchain-powered prediction markets are just starting to get off the ground with Augur, Fairlay and Hivemind paving the way. But how can these markets provide users with more accurate information? And, most importantly, can Bitcoin futures be used to help the community get a better handle on the block size discussion?
“Ideally yes, but there’s always the accuracy of ‘first hand’ or ‘expert’ information that the community values more than others,” Augur’s Director of Marketing, Tony Sakich, told Bitcoin.com. “It’s a great test of the prediction market model and one where I think it will be very helpful.”
I think Bitcoin will survive regardless of one ‘centralized’ community, as long as the decision-makers (aka developers) have a place to exchange/approve ideas, it will be fine.
Bitcoin.com also spoke in greater detail with the founder of Hivemind, Paul Sztorc, to get some more insight on this possible solution.
Bitcoin.com (BC): Do you believe that the current mechanism for Bitcoin community consensus is dysfunctional?
Paul Sztorc (PS): Of course. It is biased toward conservatism, promotes confusion, etc.
BC: Do you think this mechanism needs to be changed for Bitcoin to survive?
PS: I’m not sure I would go that far. I think that sidechains can be a great governance solution as well (through demonstration).
BC: Could you please ELI5 on what exactly is Bitcoin Hivemind? Is it a sidechain?
PS: It is a sidechain, yes. It lets one use Bitcoin in a different way — in a chain with different rules. This use promotes win-win transactions in themselves. However, a side effect of these transactions is greater creation and diffusion of knowledge in our society. This means better decisions.
Prediction markets need a blockchain because […] they inherently offend the people who make decisions, by being better at decision making. They thus face a constant uphill battle.
BC: How is it better than other Bitcoin 2.0 projects like Ethereum and Bitshares, for example?
PS: There’s a link on the homepage to a pretty comprehensive FAQ question about this.
BC: Can Hivemind be used to reach consensus on the block size debate?
PS: Creation of BTC futures, such that anyone who is unhappy can make trades until they become happy. Meanwhile, these trades let us know which BTC fork would result in a higher price.
BC: Could these ‘futures’ reduce distortion and misinformation currently swirling in within the Bitcoin space?
PS: Absolutely. It can help solve what Gavin called the “troll problem.”
BC: How can Hivemind predict whether Bitcoin Classic or Bitcoin XT will ultimately come out on top?
PS: Check out my blog post on truthcoin.info called “The win-win blocksize solution” for details.
[Bitcoin futures] can help solve what Gavin called the ‘troll problem.’
BC: What are your thoughts on Ben Davenport’s proposal of enabling stakeholders to vote on forks?
PS: Plutocracy allows the same rich guys to influence every decision, regardless of their specific expertise; also, no skin in the game. Prediction markets are “rule of the experts.” Much better!
BC: Prediction markets have been around for a while, but can blockchain technology finally help them get off the ground?
PS: Prediction markets need a blockchain because they are inherently unpopular. They inherently offend the people who make decisions, by being better at decision making. They thus face a constant uphill battle.
What are your thoughts on using Bitcoin futures as a price discovery mechanism for miners? Can this help reach a consensus? Share and comment below!
Images courtesy of Thomas Trutschel/Photothek via Getty Images, Wired