How to Create a Prediction Market using Privatized BitAssets TODAY!

[puppies]

If an asset cannot be reused then the issuer will need to recover at least the cost of issuing the asset per event.  It seems as if we are caught between preventing spam, and promoting use. 

Am I correct in my assumption that prediction market assets cannot be reused? 

Won't this lead to a massive bloat in issued assets?

[TravelsAsia]

All of this is possible today, but the GUI does not do the right thing in the user interface.   So lets use an example.

Is this a proposal that CNX is interested in creating? I would like to see it in the GUI, I would be even happier if I could buy into the future profits of this feature. Augur didn't do badly on their crowdfund.

[bytemaster]

This post is designed to document how prediction markets work with the existing BitShares 2.0 system and are ready for business today.  Before I get into the details of how you would set this up, I would like to highlight some of the primary differences:

1.  When creating a new asset (symbol) you must set the *is_prediction_market* flag to true, otherwise you will create a normal bitasset.
2.  The precision of a prediction market asset(PMA) must equal the precision of the short_backing_asset  (the asset used as collateral).
3.  The value of a prediction market asset(PMA) is between 0 and the value of the short_backing asset (SBA).   So if BitUSD is the backing asset, then the most the PMA can be worth is 1 BitUSD
4.  No price feeds are published for prediction market assets
5.  There is no forced settlement (until after the issuer performs a global settlement).
6.  In order to create a 1  PMA (Prediction Market Asset) you must post 1 USD as collateral. 
7.  After the outcome of the prediction market event is known, the issuer can publish a Global Settle Operation  (which is the equivalent of a manual black swan).  This operation will forever lock in the exchange rate between 1 PMA and USD
8.  After the Global Settlement operation has been issued, owners of PMA may use the Request Settlement operation (same as force settlement) to redeem the PMA for 0 to 1 USD depending upon the outcome of the event.'

To gain decentralization and protection against manipulation, the issuer could be a multisig account or even the committee or witness account.

All of this is possible today, but the GUI does not do the right thing in the user interface.   So lets use an example.

Suppose I create a prediction market that is denominated in USD and I call the asset REPUB2016 that is worth 1 BitUSD if the republicans win the 2016 presidency and worth 0 if anyone else wins.

If I suspect they have a 60% chance of winning, then I may bid $0.55 for 1 REPUB2016.     Someone else who thinks the democrats will win, can post $1 as collateral and create 1 REPUB2016, then sell their 1REPUB for 0.55 which leaves them with 0.55 USD and short 1 REPUB2016 backed by 1 USD.    If the democrats win, the global force settlement will free their collateral and they will end up with $1.55.  If the republicans win, then their collateral will be seized and they will end up with $0.55.

You can also use these prediction markets to predict any linear outcome.  For example, you could use it to predict the spread between the republicans and democrats where greater than 20% in favor of the REP means it is worth 0, 20% or more in favor of the DEM means it is worth $1.00 and a "tie" is worth $0.50.  A simple linear interpretation can be applied for spreads between -20% and +20%.   The benefit of the linear interpretation model is that it gives higher resolution, greater volatility, and more balanced leverage tradeoffs. 

The system isn't "perfect" by any means, but it is functional enough that participants can make/lose money without any significant biases.