building incentive mechanisms for better epistemics. (crypto,austrian) econ. epistemology. liberty. let’s meet: http://cal.com/distbit / me@distbit.xyz
distbit
Karma: 12
Otherwise, he immobilizes his funds for no payout. Unless the welfare mispricing is on the order of
what if he could trade conditional on randomisation without needing to lockup capital to be released in the case that that randomisation doesn’t occur? wouldn’t this make such arbitrage profitable even if the mispricing is small relative to 1/e?
I created a market related to some of this post’s predictions: https://manifold.markets/distbit/will-an-individualised-ransomware-c
I had in mind something a bit different...
I was not imagining unfunded orders or universal margin, where traders only receive a bill if the randomization occurs. I agree that this would reintroduce default risk unless collateral is posted, in which case the capital-cost problem comes back.
What I had in mind is closer to “lottery collateral.” Suppose there is a lottery-collateral provider that sells claims which pay out $1 only in the randomization branch, say 0.5% of the time. Since each claim only pays in 0.5% of worlds, the fair price should be around $0.005 per $1 claim.
An arbitrageur could then use these claims as collateral for the conditional market without personally locking up the full $1. The collateral provider would also not face the usual insurance-style adverse selection problem, since the payout condition is not privately chosen by the buyer and does not depend on buyer-specific hidden risk. It is just an externally randomized event. The provider could also design the lottery claims to be complementary across many markets, so that different claims tend not to pay out in the same worlds. That would substantially reduce payout variance and reserve requirements, rather than requiring the issuer to hold $1 of idle capital against every $1 face-value claim. In principle, this seems like it could remove most/all of the capital lockup cost without relying on fictional skin in the game or exposing the platform to trader default.
This would directly target the original problem: in naive randomized futarchy, arbitrageurs have to immobilize capital in all worlds even though their trade only matters in the rare world where the decision is randomized. That makes small-but-real mispricings uneconomic to correct, so the market may fail precisely where the epistemic argument needs arbitrage to be cheap. Lottery collateral would instead make the arbitrageur’s capital cost scale with the probability that their collateral is actually needed. If that works, then randomization no longer creates a large asymmetric carry-cost advantage for insiders or manipulators. Outsiders could profitably correct much smaller welfare mispricings, while the system would still have real collateral behind executed bets in the worlds where execution actually occurs.