Information Is Trapped

Imagine you have done research on Apple’s hardware manufacturing. After investigating for some time, you know that iPhone sales in China will exceed all expectations, and you think that Apple is about to skyrocket. But today, the best thing you can do with this information is to buy Apple stock.

In reality, the vast majority of information is difficult or impossible to express as a trade. If you download a trading application on your iPhone and buy shares of Apple, you’re exposed to all kinds of risks that lie outside the information you have. Your prediction about iPhone sales in China might turn out to be exactly right but you could still lose money on your trade. Currency fluctuations in the US dollar and Chinese Yuan could move against you. The US stock market may go down as a whole and crash your Apple shares along with it. Even if your information is great, there are many ways you could lose money on your trade.

So you decide not to buy Apple shares, and your information never reaches the market. That’s bad for you, because you miss out on a rare and valuable opportunity. And it’s bad for the world, because it misses out on your information and a more efficient stock market.

Instead of trading 100 shares of Apple on Robinhood, you’d much rather sell your prediction to a hedge fund who can get maximum value from your information. Hedge funds can hedge out the market risk, currency risk and other risks by making clever offsetting trades to get full value from the information. They can also trade your prediction with diversification — combining it with other predictions they have. Your own personal trade might only have a small expected return with a lot of volatility and risk. But your prediction might work fantastically inside a hedge fund’s diversified, low-volatility portfolio.

In short, your information is much more valuable to a hedge fund than it is to you. And it’s better for the world for the hedge fund to have that information instead of you because a hedge fund with $500 million dollars can make much larger and smarter trades than you can with $5,000 in savings and a Robinhood account.

If it’s so clearly better for individuals to sell information to hedge funds rather than trade themselves, where is the great data marketplace for predictions?

It doesn’t exist. And it never could have existed until now.

Asymmetric Information And Market Collapse

You’re a hedge fund manager. You get an email that says, “over the last two years I have predicted Google’s daily stock price with 70% accuracy, and I’m willing to sell you my next prediction for $10,000”. You calculate that this next prediction, if its right, can make your fund an expected $1 million in one month. Do you buy the prediction?

There are just too many problems with credibility to want to buy the next prediction. Did this person get lucky? Are they simply lying? If their past performance is real, where is the guarantee that it will continue? The seller of the predictions knows their quality but the buyer has asymmetric information. There is simply no way for the buyer to verify the quality of the predictions.

Because of these questions around the credibility of the seller’s claims and the quality of his predictions, the people with genuinely predictive data cannot find a market for buyers of their information. No one believes what they have to say. The asymmetric information between the buyer and seller leads to what’s called market collapse. The seller’s information is trapped because no market can form around this data because no buyer can assess the quality (see Nobel Prize winner George Akerlof’s work for more on market collapse).

The only solution right now for sellers of predictive information is to signal with brands or third parties in some way: “I used to work at Goldman Sachs, over the last two years I have predicted Google’s daily stock price with 70% accuracy, and I’m willing to sell you my next prediction for $10,000. You can see I also went Harvard if you add me to your professional network on LinkedIn.”

Now you have to put some faith in LinkedIn, Harvard and Goldman Sachs. This kind of third party signaling with brands might work in some small way but it is not nearly enough to give a potential buyer of the prediction any kind of peace of mind when it comes to assessing the credibility of bold claims such as being able to predict Google with 70% accuracy.

But maybe there is a technological solution for quality assessment. Maybe there is a third party that everyone trusts (or rather no one needs to trust). That technology is blockchain. Imagine a claim like this:

“Over the last two years I have predicted Google’s daily stock price with 70% accuracy, you can verify this because I sent every prediction to the Ethereum blockchain ahead of time and no one can go back in time and change a blockchain. I also placed a large stake of $100,000 on these predictions on the blockchain. I’m willing to sell you my next prediction for $10,000 in cryptocurrency, and if you are unhappy with it for whatever reason, you can destroy my stake by destroying $10 worth of my stake for every $1 you destroy of your own cryptocurrency.”

Today we are excited to announce a new protocol: an unstoppable, peer to peer, decentralized data marketplace for predictions. It will let individuals sell predictions about the world that everyone will trust, and make promises about their future performance that anyone can enforce. Using the blockchain, we have a solution to the market collapse problem. We are making a radical new kind of information market, and it’s called Erasure.

The Erasure Protocol

“The past was erased, the erasure was forgotten, the lie became the truth.”

― George Orwell, 1984

Erasure is a new decentralized data marketplace. It allows anybody to upload predictions, stake them with cryptocurrency, build a track record that everyone can verify, and earn money.

Commit to every prediction ahead of timeIn 2013, an open source project called Proof of Existence was launched. Proof of Existence allowed a user to timestamp a document using the Bitcoin blockchain. You could add your document to the Bitcoin blockchain, and thereby prove that the document existed at that time. Rob Wile from Business Insider wrote that Proof Of Existence is “perhaps the most straightforward example of a post-Bitcoin service using Satoshi’s blockchain”.

On Erasure, you need to timestamp every prediction you upload, much like Proof of Existence.

Erasure users will submit thousands of predictions; for example, a quant model for global equities might produce 10,000 stock predictions per day. It is too expensive to add all this data to Ethereum, so instead the data is uploaded to IPFS. IPFS is a decentralized file storage network, where Erasure stores each data feed. Erasure sends the address of these stored files, called a hash, to the Ethereum blockchain to get timestamped. By submitting just the the IPFS hash to Ethereum, the whole file of predictions gets a timestamp. (Think of the hash as like a URL pointing to a file containing all of the predictions on IPFS.)

This process does one very important thing, it commits your prediction to the Ethereum blockchain at a certain time so you cannot alter your prediction later. If you submitted two years of daily Google stock price predictions to Erasure and you were 70% accurate, the whole world would be able to see that and check it for themselves (say against Yahoo! Finance data). Everyone would agree that your historical predictions occurred ahead of time, because all of your predictions are timestamped on Erasure. Now people can believe your claims because they don’t need to trust you.

Reveal predictions laterWhile exposing your predictions to the world would earn you credibility, it also means people could just use them without paying you. You somehow need to conceal your predictions while simultaneously committing to them. So on Erasure, every prediction is submitted using a commit and reveal scheme. You can commit to your prediction now and get it timestamped but you only have to reveal what your prediction was later when it is no longer valuable.

Because everyone’s historical predictions are revealed but everyone’s most recent predictions are concealed, anyone can verify how good everyone’s prediction feed has been historically without ever being able to use the predictions. On Erasure, you can prove the quality of your predictions without giving anything valuable away.

On Erasure, buyers can assess which prediction feeds have the highest quality and choose to buy the feed, which gives them a special key to see all the most recent predictions before anyone else — and therefore can trade on that information before anyone else.