A parimutuel system would solve this. When settling the bet, the pool of money is divided among those that backed the winning combination, in the ratio they contributed. You can also display the odds based on how much money is behind each combination.
I wish I could post a link, but in their Discord they had some really interesting chats and I think they pretty much invented a novel AMM for this.
They are open source, so you can take a look here: https://github.com/manifoldmarkets/manifold
I forget whereabouts in that repo the algorithm is though but have a hunt!
Hey! Austin from Manifold here, thanks for the links! I wanted to note that our novel mechanism which we've termed "Maniswap" is indeed pretty cool, but for most intents and purposes a simpler Uniswap constant product market maker would already do quite well as a mechanism, with the advantage that it's really simple (explainable on the back of a napkin!)
Happy to chat more about prediction markets/AMMs, feel free to reach out to austin@manifold.markets
One characteristic of a parimutuel system for a relatively illiquid market is that the odds can swing quite drastically whenever anyone bets. In fact, even the amount one person bets is going to affect the odds they will get, so you need to display a table of odds for various bet sizes.
This may or may not be a problem, but I've found it requires more... infrastructure (notifications etc) for people to avoid being confused by it, and give people a chance to withdraw their bet if the odds are no longer favourable (alternatively put in stops, but that also complicates the system.)
The issue is that this discourages popular bets, not just heavily-biased ones.
If you divide by ratio, and add a fixed number (e.g. 2) to the "for" and "against", there aren't really false positives, and true negatives (e.g. a reasonable bet where people just happen to all bet one side, or a biased one that doesn't get much attention) are unlikely - unless there are too many bets or people are gaming the system, that is.
This pari-mutuel system (I always knew the system but did not know the name) seems near canonical to me. And the incentives seem clear cut. It seems to me that if you feel the odds for or against any prediction are wrongly calculated, then if you submit money to push those odds towards the correct ratio, then you should, on average, expect a return.
... I maybe should actually run simulations to check that, that's just what my intuition is telling me as to how it would work.
I'm trying to understand what you are proposing and the motivations for it.
By ratio, I assume you mean the ratio of the pool for and the pool against? So if prop A has $100 and prop B has $10, then the ratio would be 110/10, or 11:1. So your procedure would be to add a fixed number to this? Either 112/12 or 13:3? or perhaps you meant Prop A $100/(110/10)+2 and Prop B $10(110/10)+2
So Prop A is ~11.1
Prop B is ~2.9
Am I understanding this right? What do we do with these numbers?
