Gnosis, one of the most successful ICOs ever, was at the Shanghai Ethereum Meetup on April 23rd. And there, the project’s Regional Manager for Asia Pacific Anna George gave a short but riveting speech about some of the details on how prediction markets work. George also introduced two new products that the group is currently developing, those being a secure multi-signature wallet and a Dutch auction-style decentralized exchange.
Refresher — What Is Gnosis?
Gnosis is an Ethereum-based platform that is primarily focused on so-called prediction markets. In short, a prediction market is where many thousands of people can place a sort of wager on the outcome of a verifiable event. During the presentation, George gave the example of whether or not the Berlin airport will be finished by the end of next year.
What’s interesting about this is that Gnosis not only allows for anyone to make their best guess, but it could also potentially allow for someone with inside information who knows absolutely whether or not construction will be finished by that time. Based on this information, someone could open a large position on, in this case, yes or no, knowing that they are more than 99 percent likely to be correct and earn a profit as a result. In other words, the financial incentive will encourage people with the right information to step forward anonymously and provide an answer. If someone opens a particularly large position on a specific outcome, it could imply that they have insider information.
Other prediction markets could be ones that are based on largely random events like the weather, or, in another example she gave, the air pollution levels in Shanghai tomorrow. These kinds of predictions could perhaps be wagered on for entertainment purposes much like buying a lottery ticket.
A third use-case for prediction markets is hedging ones own investments. For instance, if one holds a large amount of gold, they could wager that the price of gold will go down. This way, if the market goes down, they profit from Gnosis. If the market goes up, they profit from their assets increasing in value. George gave the example of a farmer betting on bad weather to hedge against their crops doing poorly, a la futures.
Under the current business model, Gnosis plans to make their profit through charging a 0.5 percent fee on each prediction market position that is opened. George did note, however, that there is a high likelihood that this business model will be changed into something more inviting or flexible in the near future.
Gnosis has its own ERC-20 token that it uses for it’s prediction market, GNO. The token has seen two major price swings since launch, each time peaking at the $300 USD range before dipping back to around $100. Currently, prices are hovering around $110 each with a total market cap of $121 million and a circulating supply of just 1.1 million tokens.
Our Interview with Anna George of Gnosis
After the presentation, we sought out George and asked her a few questions about the upcoming wallet and exchange projects that Gnosis is developing. First we asked about the new wallet. George told us:
“The wallet is something I’m super excited about. It’s something we want to make very approachable for every user that has not much blockchain knowledge. We already have a multi-signature wallet and it is never been hacked. It was never meant to become a project of ours, but by the time we did our ICO, there was no multi-signature wallet available that could hold ERC-20 tokens so we have the need of designing one ourselves so our CTO [Stefan George] just built it himself and that is become very successful and a lot of projects that are doing ICOs started to use it.”
With an emphasis on security, we next asked about how 2FA, or two-factor authentication, would be implemented in the wallet. George clarified:
“You set up the service on several devices, and whenever you sign a transaction you receive a notification on your other devices saying you sent a transaction on your computer. You receive a notification on your mobile phone and then you need to confirm on your phone, such as by using your fingerprint or password, and then on your other device, such as your computer, you can submit the transaction.”
Next, we talked about recovery options in the event that someone loses a device.
“We will have several recovery options in the event that you lose your phone,” George said. “We haven’t fully decided which ones we are going to use yet. Probably, we will provide several different ones. The user can choose which one they want to use. It will probably be dependent on how much money is stored.”
In the event of a lost device, there will be two main ways that an account an potentially be recovered. On this subject, she noted:
“As for the two levels [of account recovery], what you can do is in case you lose your device, you have a trial period in which you can claim that you’ve lost it and you have to put some money up in your claim and then a time period starts, which needs to be relatively long. During this time, it will be seen if there are transactions coming from the wallet or not.
If there haven’t been any transactions for a very long time, as for example, someone might be on vacation, and [a nefarious actor] may want to take advantage of this, this [inactivity period] will be the proof that the wallet belongs to you. If you were lying about it, and there are transactions on the device, then the money you put up for the trial period is taken away from you, and put on the account of the account holder [you made the claim against].”
The Gnosis Decentralized Exchange
Following this, we wanted to know more about the Dutch auction-style decentralized exchange that the project’s working on. One major issue the team is looking to address is what’s known as front running.
“There are many decentralized exchanges popping up everywhere, but we find with normal exchanges there is a huge problem of front running,” George said. “This is much worse if you bring it on a decentralized level because there’s a lot more opportunities to do front running. This is because block times can be so long. Basically, someone can prioritize their own transaction over someone else’s by paying higher gas cost. This way, they can cut the line in front of someone else to ensure that they gain the profit of the transaction instead of someone else.”
A second issue Gnosis is looking to address, unsurprisingly, is market liquidity.
“Traditional exchanges use the order book model. Whenever you place a transaction, it is generally immediately executed. There are a few disadvantages in that model. If you have a market that is not very liquid and you submit a huge order that you want to sell a lot of XYZ tokens, or ether, but there only very few people willing to sell them, then it would obviously prefer this entire side of your order book. But this way, it decreases the price of tokens significantly, so this is a big problem.”
George then pivoted to some insights on how Gnosis plans to address the issue of market volatility that will come into play on their future exchange.
“Another issue generally is the prices of tokens currently is extremely volatile. Prices can change by upwards of 10 percent in an hour. This is huge. This is a problem that is reflective of the general token market right now. The prices are totally unstable. What makes our exchange unique is we make use of two mechanisms. One is that we are using batched auctions, meaning that we combine things together, rather than fulfilling every order as it comes in. We batch all seller auctions together, then all buyers.
The second is were using a Dutch auction mechanism which means you start at a very high [price] level and, over time, the price drops and people start submitting their order as they think the price is right. The reason why we do this is basically what we want is that in the case that the price of the token increases significantly, we can still account for that. If the price of ether quickly goes from $500 to $700, as the next auction is starting, we will still be able to give a fair price to the users.”
One fascinating feature that George discussed is the idea that all individuals that participate in a single auction will get their tokens all at the same price. This is, of course, radically different from the way most other exchanges operate today. To explain how this works, George remarked:
“Everyone who participates in one auction receives the same price. The price function is designed in a way that it falls over time. If I’m one user, and already after one hour the auction has begun and I think the prices are okay for me, and I want to buy some tokens but I don’t have enough to buy the entire pot of tokens that’s available, other people are still able to participate in the market. As long as all tokens are being sold, and then by the time all tokens are sold, this is the value of the token that everyone participating in the auction will ultimately receive.
One major advantage with this model is that front running is impossible. Because if you’re a seller, you have enough time to submit your sell order because they’re all batched together anyways. This means there’s no need for you to submit your order ahead of anyone else. As a buyer, it means you don’t have to mine a specific block, and that you can wait for the gas price to be ideal before you mine your transaction. Because again, there’s no need to cut in line in front of anyone else. Therefore, everyone receives the same price.”
Decentralized exchanges have attracted a lot of attention lately, but they also have steep gas fees. Gnosis plans to address this as well with it’s unique exchange model.
“We also offer a number of advantages in terms of gas costs incurred in using a decentralized exchange,” George said. “You submit an order, but it might not be fulfilled. What happens if it’s not fulfilled is that you still pay the gas price. You then may want to cancel the order, and so you’ll need to pay another gas fee. This is crazy. You spend so much money trying to trade and you don’t have any guarantees that your order will go through.”
With all of the hacks and other controversies that have been occurring in the cryptocurrency exchange space, it’s no wonder that many are looking to get involved in decentralized exchanges. However, as George outlined, decentralized exchanges do suffer from a few issues on their own. It will be interesting to see the effects of having a much flatter market with this alternative auction style implemented.
The wallet space is also one that is increasingly competitive. However, if Gnosis has a truly attractive product that they are able to offer for free, it could prove to be of particular interest to those that are particularly security conscious. So far, it appears that the Gnosis wallet has already been welcomed by the community, and so it seems safe to say that it will be able to hold onto its own niche space in the market for now.
What’s your take? Do you think prediction markets will be big going forward? Sound off in the comments below.
Images via Robert DeVoe