Decision markets

What is a decision market?

A decision market both predicts and decides the future. Decision markets are based on the economic theory "Futarchy" coined by economist Robin Hanson. Building on the hypothesis that markets are better than human organizations at aggregating information, Futarchy introduces the use of (prediction) markets as a tool for organizational decision-making.

A decision market allows organizations to put up proposals for trading and traders to express a view on what they think the impact is if the proposal passes or fails. At Robin.markets we are focusing entirely on decision markets that revolve around the proposing organization's native token.

As a trader, you can buy and sell the DAO token through an order book on both the pass market and fail market. Both of these markets will build a token price. The "pass price" being what the market thinks the price of the asset will be if the proposal passes and the "fail price" being vice versa. This means that if you think the price should be higher than the current pass market, if the proposal passes, you buy the pass market, and if you think it should be lower you sell it. These proposal markets are traded for a certain amount of time decided by the DAO. At the end, pass and fail prices are compared and whatever decision predicts the better token price will be implemented. All trades on the opposing market are then reversed because it's underlying event did not actually happen. This gives traders the unique opportunity to trade on both possible events before they happen and secure a profit if they are correct about how the market moves after the decision has been made. The DAO harvests the aggregated market insight of traders to make these decisions which are most beneficial to the token price.

A quick example: "SomeDAO" has a token "SOME" and is thinking about firing its current CEO. They put this decision on Robin Markets with a detailed description and what the pros and cons might be. Traders on Robin Markets can now buy and sell SomeDAO's SOME token on the pass and fail market against s USD stable coin. After a week, the markets predict that the token price will rise by 10% if the CEO is fired and stay about the same if the CEO is not fired. This mean that the pass price is about 10% higher than the fail price. The DAO then has to implement the preferred decision of the market, which is firing the current CEO (pass market). All trades on the fail market are then reversed (every trader receives their initial SOME token or their stable coins). All trades on the pass market stay and are finalized so that the tokens can be taken out. After the CEO was fired, the real market reacts and the price of the SOME token rises by 8%. Traders who bought the SOME token on the pass market for anything below the 8% addition now made a profit because they could already trade that decision before it actually happened. Anyone who sold for more than the token price + 8% also made a profit. People that bought on the pass market for more than the 8% addition, made a wrong prediction and lost a little value.

The way of thinking when trading decision markets is similar to how one might think about trading options. A trader can buy or sell the asset at a certain price now while thinking that the price will change to their advantage if the decision passes or fails. In contrast to options, the traded markets are tied to a specific DAO decision and not a probabilistic inference of general outcomes.