Crowdsourced Outcome Determination in Prediction Markets

TL;DR

This paper proposes a decentralized outcome determination mechanism for prediction markets where arbiters vote on outcomes, incentivized through a peer prediction system funded by market fees, ensuring truthful voting despite potential conflicts of interest.

Contribution

It introduces a novel mechanism enabling decentralized outcome verification in prediction markets with incentives for truthful voting from potentially conflicted arbiters.

Findings

Mechanism incentivizes truthful arbitration despite conflicts of interest.

Conditions for truthful voting are derived mathematically.

Parameter analysis for real-world implementation is provided.

Abstract

A prediction market is a useful means of aggregating information about a future event. To function, the market needs a trusted entity who will verify the true outcome in the end. Motivated by the recent introduction of decentralized prediction markets, we introduce a mechanism that allows for the outcome to be determined by the votes of a group of arbiters who may themselves hold stakes in the market. Despite the potential conflict of interest, we derive conditions under which we can incentivize arbiters to vote truthfully by using funds raised from market fees to implement a peer prediction mechanism. Finally, we investigate what parameter values could be used in a real-world implementation of our mechanism.