Vitalik carried out several operations on the Augur predictive market, based on Ethereum.
The developer talks about how to fix the irrationality of the markets.
Vitalik Buterin, the creator and main leader of Ethereum, managed to obtain unsuspected profits in the predictive markets of Augur, by betting on the defeat of Donald Trump when it was already irreversible, while the general sentiment of this predictive market still attributed the victory to the candidate.
Buterin published an essay where he points out that, in the face of obvious, public and notorious results, markets could be irrational, giving preference in its predictive bets to the most unlikely options even when the practical reality is different.
The last presidential elections in the United States were held on November 3, 2020. Since then, two months have elapsed to deliberate the results, finally favorable for Joe Biden, the new President of that country.
During that period, various public legal processes were carried out to determine the veracity of the results obtained, as well as several controversial discussions and incidents, so it was a time of uncertainty for Americans and the world.
A predictive experiment
Vitalik Buterin comments in his post that his participation in this bet was experimental, seeking to test the operation of Augur, a predictive marketplace platform that Buterin helped develop that works on top of Ethereum.
In Augur, various dynamics of prediction of results were carried out during the presidential elections between Joe Biden and Donald Trump, we reported in CriptoNoticias. Predictive markets allow users to negotiate the feasibility of information, placing bets on the possibility of certain events occurring.
The developer noted that the option predicting the defeat of Donald Trump, represented in Augur as a named token or token NTRUMP, it did not rise in price as the result became irreversible. According to Vitalik, the smart contract of the bet makes this token equal to USD 1 if Donald Trump lost the election, but at that time it was trading at USD 0.88. Market participants were not buying NTRUMP, that is, they were not betting on a truthful outcome.
It is there when Vitalik decided to ask for a loan from the DAI stablecoin, giving as collateral ether (ETH). For the USD equivalent of each ETH, Vitalik received a third of the amount in DAI. For example, if 1 ETH was worth $ 600 at the time, Vitalik received $ 200, a third of the collateralized amount.
In this way, you can stay in a safe position if the price of ETH increases, as in effect it happened between the period between November 2020 and January 2021.
After obtaining the DAIs, Vitalik used another application that allowed him to obtain 1 token for each option available to bet. The tokens he obtained were 1 NTRUMP (No Trump), 1 YTRUMP (Yes Trump, Trumpo Win) and 1 ITRUMP (Invalid result, or from special situations).
Having these three tokens (NTRUMP, YTRUMP and ITRUMP), Vitalik proceeded to sell YTRUMP and keep the other two in the decentralized finance market (DeFi) Balancer, obtaining DAI in exchange for this sale, as shown in the following scheme:
Through a collateralized loan, Vitalik managed to protect its investment and generate additional income with other operations. Source: Vitalik Buterin
Then Vitalik bought more NTRUMP, clearly the winning option, with the electoral defeat of Donald Trump. With an initial investment of USD 2,000, Vitalik repeated this process until it accumulated 367,000 units of the NTRUMP token, he said. With this, his position rose USD 308,000, generating a profit of USD 56,803 for having won the bet against the general sentiment of the market (Trump wins – Invalid Election).
In this way, Vitalik took advantage of an irrational situation in the market but that is influenced by several factors. It is remarkable that even after the first results were known, and several rulings of the Supreme Court of that country had been issued, a period passed in which many analysts did not finish giving the victory to Joe Biden.
Vitalik Buterin comments on the irrationality of the markets
The socio-political scenario and public opinion can influence the beliefs of the market, but also, a factor that Vitalik Buterin describes as “too much intellectual humility” influences.
This “humility” or modesty would cause human intelligence to decide to ignore the most obvious and easy result to determine as correct, although in fact it is, just because the social group still believes otherwise.
“Too many people, especially smart ones, suffer from excessive humility, and they very easily conclude that if no one has taken any action, then there must be some valid reason not to take it,” says Buterin.
Buterin also mentions that perhaps users feared that Donald Trump enthusiasts could sabotage the smart contract on Augur, although this is a long shot.
Also, he pointed out that the scheme to follow could be very expensive and complex for inexperienced users, as there was much more liquidity available for the YTRUMP option than for NTRUMP, Buterin said. For that reason, he used several platforms to carry out his operation, with the disadvantage that all funds were blocked for 2 months.
Finally, there is the possibility that traders bet on the opposite option suggested by the results, as a valid investment strategy in their opinion. If many people bet that Donald Trump would be defeated, but the result was completely reversed, the winnings of those who have bet on the presidential victory would be astronomical.
The reasoning of these traders may be that of set a position contrary to the general market trend, seeking to reverse the appreciation of a certain asset in their favor, giving them profitability or good stock market performance.
Of course, here market participants had no way to change the US electoral trend, but when it comes to financial markets, mass behavior could influence the decisions of other traders.
With this practice, if an unlikely result is met (Donald Trump wins the election), it would be beneficial for those who have bet that it is, even if no one suspected it. In the case that concerns us, Vitalik bet on the option that had the least support, (Donald Trump loses), but also the most obvious and likely to be fulfilled, as it happened.
This entire saga has proven to be a very interesting first-hand experiment in predictive markets and how they rub against the complexities of social and individual psychology. It shows how market efficiency really works in practice, what its limitations are, and what we can do to improve.
This distortion was pointed out as an inefficiency of the current predictive markets, although Vitalik says goodbye with a proposal to improve this type of blockchain application. The developer argues that it is very expensive to bet on the most probable outcome and very cheap to bet against, which makes predictive markets possible to include unfeasible options that people could opt for, assuming costs of a lost cause.
However, Vitalik says that predictive markets have improved and will continue to do so. Taking the US elections as a test, the developer assures that there will be more cases in the future where predictive markets could play an interesting role.