For events where the likelihood changes not constantly but very big at one point in time automated market makers with an uptick protection might be more efficient.
Lets say we have an event: Will an earthquake happen in 2016 in San Francisco. Or: Will the FED increase the interest rate.
This events can change the likelihood of one outcome to “1” in a second. Sure - the one who “reports” on the outcome first by buying the winning shares should rewarded but it might not be necessary to give him the full remaining balance of the market maker funding.
The market maker funding should make it easier to get markets started but there is no reason to “trough money away”. So it would clearly be favorable to have some kind of uptick protection.
One mechanism could be that a price movment is limited to x% - lets say 5% per hour. If this limit is reached the market maker freezes and people can do bidding on the max price they are going to pay.
So lets take the earthquake example. The price would be constantly at 4% and than surprisingly an earthquake happens. The one who realized it first (and still has a internet connection and no other trouble) would buy shares of the winning outcome and move the prive to x + 5% = 9%. Than the market would be frozen. Normally people could buy shares at the price of 0.09 in this state. Instead there will be a bidding period where people do a bid for shares. Every bid would extend the bidding period. So if at least two people are bidding the should move the price close to 1.
One open questions:
How should trading continue if the bids go up to 0.5 but not to 1. If trading would continue at 0.5 the market maker would lose its property of “bounded losses”.
I think some of these problems would be solved if users was (always) allowed to place a bet that is at the moment unmatched, that way taking away the need of a constant market maker (like betfair).
Oh yes - we will for sure have an regular orderbook as an additional option soon.
However - if you don’t have a market maker you really need a lot of people active on a market to get is started at all. Even on Betfair (which is a billion $ company already with a lot of users) there are quite a lot abandoned markets. So to guarantee a forecast at any time and to solve the “chicken/egg” problem a automated market maker is very helpful.
But by the way - you would have a similar problem with a order book. No one would like to place an open order against the earthquake because if it happens he just loses its money.
On Betfair for example on live sport bets (soccer for example) all open orders are canceled if a team scores a goal. But that obviously would requite too much of supervision and manual activity.
Yepp, market maker is needed, and more importantly is volyme (which is the hard part), otherwise the market maker will just end up losing his money and then there are no more market makers. So how do you get liqudity/volyme, i guess by providing markets that don’t exist anywhere else.
Regarding binary bets (earthquakes, scoring in games) maybe you could have some sort of “cooldown” so a matched bet is only valid after let say 1h, if the data-source/oracle says a earthquake happend all bets matched within cooldown are refunded. Im sure this problem has been solved somewhere before, just need to find the correct people (which might be hard).
Instead of 1 market maker who is taking the all the risk by funding the market, you have a crowdfunding stage where users provide liquidity in exchange for their share in trading fee profits.
The market ‘crowdmaking’ introduces an extra step before the actual trading happens but it allows to validate with the crowd whether an actual market has a chance of becoming popular.
The more popular the market can become → the higher the fees it will generate → the more it makes sense to put in during the crowdfunding stage.
And at the same time the more initial liquidity the market has, the more likely it is it will attract attention of the traders. If it really works (and that’s a big IF) as I describe it, it’s a self fulfilling prophecy
But in general, in the age of social media, it’s better for the market to have 100 BTC of initial liquidity from 100 ‘makers’ putting in 1 BTC each than 1 market maker putting in 100 BTC.
