DPM Lite Paper

Free and fair markets on chain.

Executive Summary

We propose the creation of on-chain, permissionless prediction market infrastructure that utilizes the open nature of blockchains to enable new types of markets to form around real world events in a way that has never been possible before.

This type of open infrastructure will lead to the creation of new types of markets and asset classes that leverage the collective intelligence found in localized knowledge.

Introduction

The creation of free markets has had an incredible net positive effect on human civilization. It has unlocked human potential in a way that no other centralized institution could, by tapping into the wellspring of human ingenuity in a permissionless manner. Every advanced society in history has had robust capital markets to coordinate the flows of resources to the most innovative people and projects. Capitalism is built on this principle, and has created more abundance than any other system in history.

However, markets today are constrained in their scope. Creating robust and efficient markets in the real world requires permissioned access from the owners of capital and various other bureaucratic and institutional bottlenecks that restrict capital flows, and proper price discovery in the places that most need it.

Within the cryptocurrency space itself prediction markets have been key drivers of the growth of the space as a whole. The creation of the Perpetual Futures product, a synthetic product to track prices of the top cryptocurrencies, created a new form of financial activity in crypto markets. Pioneered by the BitMex exchange, this product and exchange was arguably the key driver of the 2017 boom, and created outsized returns for the exchange. More recently, the advent of Rollbit, Polymarket, and various others have shown the appetite for prediction markets outside of just cryptocurrency price speculation.

Problem

While prediction markets such as those above have been gaining steam within the industry (as well as outside of the cryptocurrency space), the existing solutions fall short in certain ways:

Permissioned Access

These solutions are permissioned, meaning astute market observers are unable to create markets of their own. This limits the types of contracts that can be created, and creates additional artificial bottlenecks around information flows and price discovery.

Missing Liquidity Incentives

Current systems lack the proper incentive system and user experience to make such activity feasible for the average user. As we will see, creating new markets requires the right type of incentive mechanism as well as proper guarantees around soundness of resolution. Despite interesting new mechanisms such as optimistic oracles, as we will see the proper incentives to bootstrap liquidity and create robust markets do not exist currently.

Limited Scope

The types of contracts and assets in the current offerings are limited in their scope, resorting back to traditional casino games, sports, gambling, and the like. This limits the potential for more robust and wide ranging markets to be created, such as those servicing the blue ocean of real world assets and events.

Conclusion and Roadmap

We propose a new system of creating open, permissionless prediction markets that promises to unlock new opportunities for knowledge based capital flows, innovation and price discovery.

Our roadmap and future plans are as such:

  • Infrastructure Development for decentralized prediction market creation and participation for all users. We will be creating open source liquidity pools to create fair markets for any user to tap into, modeling LP positions created in various DeFi applications but incorporating additional layers of variability for specific use cases related to prediction markets. Smart contracts will be on the Polygon network to start (with a focus on expanding to multiple chains in the future) and are currently in beta testing.

  • Oracle Integrations to create access the most robust data available on chain. We are currently in talks with the teams at UMA, API3, Chainlink, and various other oracle solutions to create the best experience for the deployment of new markets. Using a combination of on chain oracles as well as optimistic oracles, we will create infrastructure that allows for both on chain and off chain data to be incorporated into new markets and resolution to be achieved in a fair and trustless manner.

  • Incentivized Market Creation to bootstrap initial liquidity and onboard early adopters to both create new markets and participants to engage in a new asset class. We strongly believe in the ingenuity of open market participants to create interesting new markets if incentivized in the right way. We imagine that, using our suite of oracle integrations, markets can be created around things such as:

    • Real world events (elections, interest rates, governance promises, match outcomes, etc.)

    • Friend.Tech share market caps

    • On chain events (TVL measures, DeFi loan repayments, contract deployments)

    • Token / NFT floor prices

These are just the tip of the iceberg. Open markets draw the ingenuity out of individuals in the crowd, but they must be incentivized and compelled to do so. One can imagine a world where any knowledge based economy can have open prediction markets for users to participate in a permissionless manner, without regard to jurisdictions or levels of access to institutional capital.

Our belief is that the creation of these types of markets will create a more accessible and fair world.

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