Should GnosisDAO research how to create efficient sets of decision markets?
Currently, the governance process of GnosisDAO requires at stage 3 that a pair of prediction markets be created which enable the GNO/USD price to be estimated dependent on which decision is taken. I’ll call these the “primary markets” - primary markets address the “bottom line” question - does this decision benefit Gnosis? Under some conditions, it might be beneficial to create a set of markets that support the primary market.
Consider the following unrealistic scenario: Both Alice and Bob are pretty sure that trade volume is the only consequence of Gnosis Protocol v2 (GPv2) implementation that is likely to impact the price of GNO/USD. The market pair GNOyes/USDyes and GNOno/USDno computes an outcome map O: GPv2 y/n -> GNO/USD price. Because of Alice and Bob’s assumption that volume is the only consequence that matters, O can be factorised as the product of a volume map V: GPv2 y/n -> Volume and a price map P: Volume -> GNO/USD price, with O = P \circ V (I’m ignoring the fact that these should be probabilistic maps to keep it simple).
Alice has deep knowledge of the trade volume Gnosis Protocol v2 is likely to have if it is built, and so has strong views on the likely form of V_Alice, but is completely ignorant about whether a certain level of trade volume will lead to a higher, lower or unchanged price of GNO, and so has no views on the likely form of P. Bob has strong views on P_Bob, but no idea about V.
Given a conditional GNO/USD market with arbitrary relative price of GNO and USD and hence arbitrary outcome map O, Alice due to her ignorance of P cannot offer an alternative price on the basis of her knowledge of V_Alice; according to her any level of trading volume is equally consistent with any GNO/USD price. Similarly, Bob’s ignorance of V prevents him from offering an alternative price based on his knowledge of P_Bob; according to Bob, any decision is equally consistent with any level of trading volume. Even though each has some knowledge relevant to the original question, neither can contribute this knowledge by making a trade on the market. Note that if they were not perfectly ignorant of one quantity they could offer a trade, but I expect that this problem persists to some extent even if Alice is more ignorant of P than V, but not maximally ignorant.
If they could privately communicate their knowledge to each other, this problem could be solved - Alice could use Bob’s estimate P_Bob and vise versa. However, maybe this doesn’t happen often in practice. Alternatively, suppose instead that there were three market pairs:
- GNOyesGPv2/USDyesGPv2 and GNOnoGPv2/USDnoGPv2 (estimate Q, the “primary market”)
- GNOhighvolume/USDhighvolume and GNOlowvolume/USDlowvolume (estimate P)
- HVyesGPv2/LVyesGPv2 and HVnoGPv2/LVnoGPv2 (estimate V)
where HV and LV are synthetic assets that pay out with high or low trade volume respectively (these could be tokens in another prediction market). In this case, Alice can contribute her estimate V_Alice to market 3 and also use market 2’s estimate of P to contribute to market 1. Bob can similarly contribute to market 2 based on his estimate P_Bob and use market 3 to estimate V and thereby contribute to market 1. The key difference is that the secondary markets allow Alice and Bob to contribute their knowledge to market 1, so the estimate from market 1 should improve.
Another way of looking at this: Alice and Bob in isolation agree that there should be no change to the GNO/USD price in expectation based on either decision, but if they were able to share their models then they would believe something different about the GNO/USD price. Furthermore, the secondary markets facilitate sharing of models.
Discussion & further work
The general question here is, given a fixed amount to pay for some set of markets that inform a decision, what is the optimal set of markets to create? I think that the answer might not always be “only the primary market”.
While the assumption of perfect ignorance on the part of Alice and Bob is unrealistic, the price of GNO really does depend on many things, so it seems plausible that many players might have knowledge of some relationships but are relatively ignorant of others. I think it’s also plausible that players are unlikely to privately communicate to coordinate their knowledge. It is not obvious to me whether the gains from secondary markets would typically be large or small.
Do you think this idea is worth pursuing? What are the most important questions? Some possibilities:
- Develop a rigorous theory of gains from multiple markets and write it up
- What is technically required to implement multiple markets (e.g. synthetic assets, resolving Change the funding structure of Gnosis Impact markets)?
- How could GnosisDAO experiment with single vs multiple markets?
I’m a PhD student working on foundations of causal inference, so the first option is the one that stands out to me - I would like a stronger reason to believe the secondary market effect was large before pursuing the idea further.