Back at the dawn of Web 2.0, concepts of wikinomics and user generated networks like wikipedia were just emerging. I was very interested in these concepts. A platform called InTrade came into existence and I started making markets on this platform. InTrade was a “prediction market”. The platform allowed users to wager on the outcome of events by way of binary options. The events would either happen or they would not, such as “will it rain in New York City tomorrow?”. The platform was revolutionary in many different ways because it allowed users through the interaction of a free market to determine the likely-hood of things happening in the future. The option prices were easy for lay persons to understand because binary prices can also be viewed as percentage chances. If rain in New York City tomorrow is priced at 70, then the price implies a 70 percent chance if the payoff is 100 when rain occurs. The system also didn’t have any counter-party risk since users were trading binaries, they only had to post the entire potential liability as collateral then the net position will sum to zero. There was still some platform risk (the risk that the entire platform would collapse and users would lose their account balances).
Unfortunately, InTrade became bogged down in government regulations and was forced to shut down. Since the platform was accepting USD payments, various US government agencies could reach out and try to control it. In InTrade’s place Nadex emerged to offer binary event derivatives, but the platform is closed to Canadians, and so I’ve never been able to engage the system.
With the rise of Bitcoin and other digital currencies, there is a new opportunity to create an event derivative exchange, and there are a few exchanges that have emerged. Augur, Predictious, and Fairlay.