Scott Sumner has famously proposed that the Fed stabilize monetary policy by pegging nominal GDP futures contracts in such a way to ensure that expectations for nominal income growth remain steady. For more details, see here; the merits (and demerits) of this proposal are not the subject of this post (but will be the subject of a future post).
One major problem: markets for NGDP futures don’t exist in the wild!
To be fair, Scott and the Mercatus Center have helped to fund a competition on the Hypermind website, where there is a fixed pot of prize money for correctly guessing the year-over-year NGDP growth rate. But this is not a two-sided market, and the pot of prize money is fixed – as the number of bettors increases, the expected winnings decrease.
Well, good news: an NGDP futures market is now live on the Augur blockchain. The specific contract is simply a binary option: will the growth rate in NGDP from 2018Q1 to 2019Q1 be greater than 4.5%?
Background on Augur
For those unfamiliar, Augur is a new cryptocurrency project – it launched just last Thursday – built on the Ethereum platform that allows holders of its currency, “REP”, to create prediction markets. To speculate on such markets, an investor must use the Ethereum cryptocurrency (ETH).
The platform is decentralized: for everyone who wants to bet that NGDP growth will exceed 4.5%, there must be a counterparty who takes the other side of the bet. That is, the creators of Augur are not acting as market makers for the contract. The price of the contract will move to equilibrate supply and demand in a decentralized market: if the price is 0.7 ETH, that indicates that the market gives a 70% (risk-neutral) probability that NGDP will exceed 4.5%.
Of course, one can create prediction markets for literally anything. There were markets for who would win the World Cup; today, the most popular markets are cryptocurrency futures markets where traders can bet e.g. if the price of Ethereum will close the year higher than $500. A more interesting market is one asking, “Which stablecoin will have the largest market cap by the end of 2018?”, though no one has bet on this contract yet. Another interesting contract asks if a new cryptocurrency project will launch on schedule.
The NGDP prediction market
Back to the NGDP prediction market. As mentioned, there is currently only one contract on Augur related to NGDP, and it is a simple binary option on if NGDP will be greater or less than 4.5%. A buy order thus indicates that you believe yes, NGDP growth will exceed 4.5%, while a sell order indicates that you think it will be less than that threshold.
Hopefully in the future richer contracts will emerge, and speculators could bet on more specific outcomes: different time horizons, betting on particular growth rates rather than a simple binary choice, etc. This would provide richer analysis for policymakers and academic study.
The importance of blockchains and decentralization
To wax unabashedly lyrical for a moment, besides the practical macroeconomic application, what’s great about this is that it demonstrates how technology is liberation.
The major obstacle to creating an NGDP futures market in the past has been that prediction markets have been heavily restricted by government regulators. Intrade, a political prediction market, famously had to shut down due to a regulatory crackdown.
Augur, however, is a decentralized market which was only made possible in the last decade by the development of blockchain technology. There is no central point of failure, like with Intrade, where the CFTC can apply regulatory pressure to force a shutdown.
(Related. Despite the protection provided by decentralization, the regulatory environment around cryptocurrencies is notoriously… murky. And the state of regulation is possibly even more murky when it comes to predictions markets in particular. Calibrate your risk aversion appropriately before getting involved with this stuff.)
Viewing current probabilities
How can you check out the current market price/probability? One way is to download the Augur app and view the state of the market in the app, including the full order book (pictured below). The faster method, mentioned above, is to check out predictions.global, a great website that is layered on top of Augur and posts the current probabilities on all Augur contracts. Just search “NGDP” and you’ll see the contract (permalink here).
As of this writing, the market-implied (risk-neutral) probability that NGDP growth exceeds 4.5% is 90%; but only 0.05 ETH ($23.41 at current exchange rates) has been bet on the market. The market creation fee on this market is at 0%, so bettors keep essentially all winnings, unlike many other Augur markets. So go and make some bets!
That’s the news. You can probably stop reading here. In the rest of this post, for those interested, I want to provide some resources and give an extremely limited sketch on how – hypothetically ☺ – one would go about setting up a prediction market on Augur. Given the number of people who have asked, I’ll highlight that there is no coding required. Augur has an app that makes things pretty easy!
A step-by-step guide to creating a new market on Augur
This guide is not meant to be comprehensive, in any way – I’ll provide a list just to set things off in the right direction. Fortunately, there are a fair number of resources online; I’ll link to many, but if the process is unclear, be sure to search for both articles/videos that can provide walkthroughs.
- Buy some Ethereum
The simplest way to do this is via Coinbase. Here’s a guide for how to get set up with that. How much should you buy? You’ll probably need something like 0.03 ETH (~$15 at present) at the bare minimum to set up the market, though a good chunk of that will be rebated to you after the market ends.
If you want a more precise number for how much ETH to purchase, you’ll need to wait until step 7; you can come back to this step then.
- Download Metamask
Metamask is a cryptocurrency wallet that is embedded in your browser. Instead of a central party like Coinbase holding your coins, you will now be the custodian of your coins.
Simply add the browser extension. Don’t lose your key! This video gives an overview of Metamask.
- Transfer your ETH to Metamask
If you bought via Coinbase, simply transfer. This article explains.
- Set up a MyEtherWallet (MEW)
Create an account and connect it to your Metamask.
- Buy some Augur via MEW
- Download and install the Augur app. Open it and wait for it to sync.
- Set up your market!
- Monitor your market on http://predictions.global/ and, hopefully, watch the bets roll in.
- NGDP futures via blockchain: Market monetarism meets cryptocurrency (And: how to set up a prediction market on Augur)
- The "Efficient Restaurant Hypothesis": a mental model for finance (and food)
- Behavioral biases don’t affect stock prices
- Yes, markets are efficient – *and* yes, stock prices are predictable
- NGDP targeting and the Friedman Rule