Applications of Security Deposits and Prediction Markets You Might Not Have Thought About – Ethereum Blog

Introduction

Vitalik Buterin

technical

Special thanks to Vlad Zamfir for his work te developing many of the ideas behind prediction markets for content curation.

For the past six years, people have bot searching to attempt to find those elusive applications of blockchain technology that could ultimately pauze out into the mainstream. For cryptocurrency, the applications are largely already known – however it of course remains to be seen just how well it will be able to retain its advantages spil traditional payment systems proceed to become more efficient. But what about brainy contracts and crypto Two.0? One route that wij can take is to simply look where legal contracts are being used today, and see where wij can increase efficiencies by “smart-ifying” spil many of them spil possible. Another route, however, is the Peter Thiel-ian zero-to-one treatment: see if it’s possible to use thesis instruments to create industries that presently do not exist. Hence, let us take a detour along that path, and see some of the more underappreciated and interesting applications that brainy contracts can provide.

Hashcash meets Proof of Stake

Albeit proof of work is today known primarily for its function te blockchain overeenstemming algorithms, its original function wasgoed te fact something fairly different. The very first major use of proof of work wasgoed Adam Back’s Hashcash, a protocol that attempts to fight email spam by making spam emails more expensive to generate. Proof of stake is today similarly best known for its applications te blockchain overeenstemming, and the theory is that because of the way modern proof of stake works – permitting users to waterput at stake large amounts of economic resources for security without, te the normal case, actually spending them – it could potentially be vastly more efficient. So this leads to an interesting question: can wij apply thesis advantages to make a more efficient version of Hashcash using proof of stake spil well?

Let us embark by describing the problem. The basic principle behind Hashcash rests on the idea that email today tends to be split into two categories: desirable email (“ham”), which people spend a reasonably large amount of effort writing and which people derive high value from reading, and undesirable email (“spam”), which people normally spend a much smaller amount of effort vanaf email writing and which people derive a negative amount of value from reading. Hence, the theory goes, by affixing a puny mandatory cost to each email sent, the “ham” can get through with only slight extra cargo, whereas “spam” would be made entirely unprofitable. This “cost” is paid te the form of electro-therapy and computational effort which is used to solve a mathematical puzzle that can be quickly verified by the recipient’s client before showcasing the email to the recipient.

The problem with this treatment is threefold. Very first, spammers may simply switch to a strategy of spending slightly more effort on each email (eg. spending five seconds of human labor vanaf message to make it more likely to catch the reader’s attention or bypass spam filters), and the threshold of computational work that would be needed to actually zekering the majority of spam would be fairly large. 2nd, spammers are more professional and have better access to specialized laptop hardware that can quickly and cheaply solve thesis computational puzzles, so a cost that might be five cents to the ordinary user might only be a tenth of a cent to a spammer. Third, spil this now-famous checklist listing flaws ter popular proposed solutions to email spam points out, it is considered very desirable to have a system where “sending email should be free”.

So here is a proof-of-stake alternative. When you send an email, you do not need to compute an expensive computational puzzle, instead, send a transaction to the blockchain which creates a contract containing some amount of money spil a security deposit. Spil part of the email, send a private key to the recipient, which the recipient can submit into the contract to demolish the deposit (or donate it to a standardized charity) if they want to. If the deposit is not ruined for some number of days, it is refunded to the sender. Note that there would be no build up to the recipient te ruining the deposit – the only motivation to do so would be zuivere spite. Spil a result, wij get an asymmetry: the average cost for normal people to send an email would be puny, because the recipient would only click “Report Spam” ter the zonderling case that they are malicious, but the average cost for spammers would be fairly high indeed – and specialized hardware asymmetries would not help spammers one bit.

One could see deposits going spil high spil a dollar te size, and one can even adopt a graduated scheme: senders can send whatever deposits they want above some ondergrens, but the level of notification that the recipient sees would depend on the precies amount. If it’s $0.1, then it’s just an email te their mailbox. If it’s $1, then a few phone notifications. If it’s $500, then their phone would stadionring at maximum volume overriding all other settings – but the sender best be ready to pay the price if the recipient deems the sender’s intrusion unjustified.

One can create more advanced versions of this scheme that do not require sending a transaction to create a fresh deposit for each email, one can imagine a scheme where the sender sends out many keys to ruin portions of the same security deposit, alongside signatures telling that those keys are valid, and recipients publish the signatures (but not the keys!) to a Whisper-like channel permitting them to quickly sample and make sure that a particular deposit is not “over-subscribed” with destruction keys (one precise mechanism for doing this is to only treat signatures containing an index from 1 to N spil valid, and add a rule that states that two signatures with the same index can be submitted to ruin the entire deposit with 10% transferred to the submitter, hence, one can be fairly sure that at most N signatures for that deposit exist). This would reduce the transaction flow to harshly something like one transaction vanaf email sender vanaf year. Te any case, wise contracts opoffering near-infinite slagroom for creativity te optimizing the details.

Prediction Markets and Reddit

One of the largest debates te online communities like Reddit is the question of exactly how much centralized moderation is justified. One view is that the very power of the internet comes te large part from its egalitarian decentralized nature, and the fact that no single party has a higher class of authority than any other. Some people may be more influential than others, but (i) that is a difference of degree and not a categorical distinction of class, and (ii) it is fundamentally the audience’s choice to be influenced. The other view is that without centralized moderation, communities inevitably collapse into mediocrity and puinhoop of the undesirable kleuter, essentially, Eternal September, and so having a petite number of users ultimately te charge is, spil is ter many places the case, a “necessary evil”.

Te practice, community voting moderation is fairly powerful, but the centralist view also seems to have some merit. Albeit comments that a community does not want to see do eventually get voted down, at least on Reddit specifically the process takes time, and there is still a period of one or two hours during which such content remains on the pui pagina. Within a voting framework, to some extent this is unavoidable: if it wasgoed possible for a barrage of downvotes to very quickly eliminate content from the vuurlijn pagina, that itself would turn into a censorship vector for vocal minorities. However, what if there wasgoed a third way to solve this problem, by using our dearest governance mechanism: prediction markets?

Prediction markets have so far, including by myself, often bot introduced spil a governance mechanism that could one day be employed for very large-scale decisions: whether or not wij should bail out the banks, hire or fire a particular CEO, or come in a particular trade agreement. However, perhaps it might be better to introduce prediction markets into the world spil a device for decisions which are far more small-scale and non-threatening – perhaps on the scale of hundreds or ems of dollars, or even ten cents.

One could imagine a vormgeving that works spil goes after. Rather than simply being votes, upvotes and downvotes to a comment on a hypothetical PredictionReddit would be bets on a prediction market specific to that comment. The prediction market would be seeded by a mandatory bet that would need to be made by the person making the comment that their comment will be accepted spil good, from there, upvotes and downvotes would shift the “price” of the market depending on how people vote. 99% of the time, the market would have no effect except that comments with high prices would be shown more prominently on the interface, the remaining 1% of the time, however, the comment would be submitted to a meta-moderation panel, which would vote on whether the comment is good or bad (or perhaps some score te inbetween), and the participants ter the prediction market would be compensated appropriately based on how well they predicted this score.

The meta-moderation panel could ter principle be fairly large, potentially every single participant ter the community could be included, provided an effective anti-sybil mechanism wasgoed te place. Even a SchellingCoin oracle could be used. It also does not have to be the case that 99% of markets are discarded, one could instead have a prototype where all markets are processed, but only a petite portion of the meta-moderation panel sees each individual postbode, the number of people need only be large enough that they cannot practically collude for the purpose of insider trading the prediction markets. Another alternative is to have the size or probability of meta-moderation be proportional to the volume of the market, so that the posts that receive the most attention are the ones where the stakes are highest. Ter any case, this particular means of combining Reddit and cryptocurrency seems at least a bit more promising than simply integrating the capability to express condolences for someone’s death by micro-tipping their relatives three cents.

Te principle, either of thesis two models could be extended fairly a bit: imagine ads that are more expensive to maintain the more annoying they are to viewers, or a decentralized search engine where anyone can “plug in” their ranking algorithms by participating ter the prediction markets, and profiting only if the algorithms are effective. Oleg Andreev’s 2-of-2 escrow could be augmented with a reputation system via a prediction market on the probability that the escrow deposit will be ruined or payment delayed. Just reminisce, security deposits and prediction markets are essentially omschrijving: a prediction market is a security deposit where anyone can challenge and require a higher deposit te response, and anyone else can back the original depositor up, and a security deposit is a prediction market where one particular party is coerced to make a mandatory bet.

Perhaps this is a large part of the potential of what crypto Two.0 technology can suggest: bring the internet from elementary information technologies to economic information technologies that could potentially radically increase efficiencies, at least ter a few sectors of the digital economy, by using incentives to more cleverly elicit the information that wij all individually have. Ter any case, let’s build thesis contraptions and find out.

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