Comment by smeej
1 day ago
It's not a bounty, though, right? It operates like other trading markets? So unless they have big money to wager, they don't have big money to gain. If it's hovering at, say, 10% odds, it's not like they can automatically 10x their money because other people have to take the opposite side. There would have to be a lot of liquidity in the market for their large bet not to move the odds, and as the odds move, they make less money.
> So unless they have big money to wager, they don't have big money to gain.
It requires that they put down collateral (the purchase of the the yes bets) that they lose if they don't meet the contract, so they do have to have starting capital.
> because other people have to take the opposite side.
That is to say that there must be people offering the bounty.
The size of the bounty isn't defined by the price of the contract, but the total upside available in the order book.
> and as the odds move, they make less money.
They have to put up more collateral for the remainder of the contract if they want that upside - but they make all the money that they already put up collateral for.
> The size of the bounty isn't defined by the price of the contract, but the total upside available in the order book.
But one person doesn't get the whole thing. ALL the people holding that side of the contract split the payout, in proportion to the size of their holdings in that side of the market.
I think if I use hypothetical numbers, it will help me explain how I think it works, and maybe this will help someone figure out where my error is.
Let's imagine the market is about whether I will die by the end of the day. So far, there are $500,000 in total bets in the market, and there are 5,000 shares in this market. Let's say it's currently sitting at only 10% odds that I'm going to die. I think that means 4,500 shares, or $450,000, is on the "No" side and 500 shares, or $50,000 is on the "Yes" side. Do I have that right so far?
If nothing changes about the market and I'm still alive at the end of the day, everyone who holds a "No" share splits the $500,000 pot, correct? There are 4,500 of them, so they each get $111.11 per share.
But suppose someone has a solid plan to kill me by the end of the day. They decide they want to dump $50,000 in on the "Yes" side. That's not going to buy them 500 shares, because they would need someone willing to sell 500 shares at the current price. They'll actually get well under 500 shares, and probably not even half that many, and they'll still be splitting the pot among the other people who already have the 500 shares on the "Yes" side. So they're still at not even half the "Yes" side of the market. They can probably double or triple their money, but we're talking about making another $50-100k on top of getting their own $50k back. It's not like they get the whole $500k.
That's what I mean when I say it's "not a bounty." A "bounty" makes it sound like, "If you're the one who kills smeej, you get $500k," but that's not what's happening here.
Lots of people might be willing to try to kill me for $500k. A heck of a lot fewer are going to be willing to try to kill me for 2-3x whatever capital they can come up with right before the hit.
Am I at least understanding this part of it correctly, how the payouts actually work? If I'm not, that would go a long way toward helping me figure out what I'm missing.
> I think that means 4,500 shares, or $450,000, is on the "No" side and 500 shares, or $50,000 is on the "Yes" side. Do I have that right so far?
No - there's always an equal number of contract outstanding on both sides of the bet. A contract is a promise from the person who sold "no" to pay the person who bought "yes" a dollar if the outcome happens. These contracts can trade from anywhere between 1 cent to 99 cents corresponding to a 1% chance to a 99% chance that you would die*. The odds the market reports is just whatever price the last contract traded at (or alternatively whatever price sits between the current open offers to buy/sell contracts. In liquid markets these tend to be the same).
> If nothing changes about the market and I'm still alive at the end of the day, everyone who holds a "No" share splits the $500,000 pot, correct? There are 4,500 of them, so they each get $111.11 per share.
They each get $1 per share. Their profit is $1 minus how much they paid for the share. It's not (meaningfully) a shared pot which is divided up, it's a fixed amount per share.
> They decide they want to dump $50,000 in on the "Yes" side. That's not going to buy them 500 shares, because they would need someone willing to sell 500 shares at the current price.
Ignoring the numbers at this point - you're generally right that they need to find someone willing to sell them the contracts. The existence of a large number of outstanding contracts doesn't guarantee this - they might be held by someone who is holding them to minimize the payout a hitman could get for killing you for instance.
The most direct guarantee is the order book The order book is the collection of open offers "I'm willing to sell X yes-contracts at Y price" that the market has for potential purchasers. The hitman can look at this and snatch up all of these simultaneously (up to some race conditions in the market - we can mostly pretend those don't exist but they do introduce some risk on the hitmans side). This can be thought of as the size of the currently available bounty.
There's a chance the market will continually over-price these yes contracts - and the hitman will never kill you as a result. That would be a huge mistake on all the financially motivated holders of yes contracts though - their positions go from worth something (if they sell to the aspiring hitman) to worth nothing if they don't price them low enough. In general you should expect the market to find the price at which a hitman will carry out the contract - so long as there's enough money in the market in the first place.
* Ignoring transaction fees and the time value of money, it's close enough for this discussion.
3 replies →