So this has the same flaw that Predictious has. It's building a BTC bank in addition to a prediction market.
That's the easiest thing to build, coming from a world of traditional fiat money banking. But BTC enables something superior - 2of3 transactions between betters. We create a 3 way transaction - Long says "I want the money". Short says "I want the money". When the bet is concluded the arbitrator says "Long won, give me 1%."
The arbitrator can never go insolvent - in fact, the arbitrator never needs to hold a single bitcoin.
There is no such thing. In a 2 out of 3 transaction, 2 out of 3 parties have to agree for the transaction to happen. Thus, if the winner agrees and the arbitrator also agrees, the transactions is conducted. It's a cryptographically secure agreement.
Unfortunately, there's no really good way of establishing that two pseudonyms are not held by the same person, in a decentralized system. Doubly so when legal enforcement isn't available. Of course abuse is harder the more arbitrators you incorporate, but expense and difficulty are higher as well.
Comments
So this has the same flaw that Predictious has. It's building a BTC bank in addition to a prediction market.
That's the easiest thing to build, coming from a world of traditional fiat money banking. But BTC enables something superior - 2of3 transactions between betters. We create a 3 way transaction - Long says "I want the money". Short says "I want the money". When the bet is concluded the arbitrator says "Long won, give me 1%."
The arbitrator can never go insolvent - in fact, the arbitrator never needs to hold a single bitcoin.
You should check out https://github.com/psztorc/Truthcoin , which builds up on that idea to design a fully decentralized prediction market.
Or even better than multisig, on-blockchain transactions and Truthcoin: http://www.reddit.com/r/Bitcoin/comments/1ycjdi/whitepaper_d...
What if the loser refuses to pay? How does the arbitrator get the coins without holding coins?
There is no such thing. In a 2 out of 3 transaction, 2 out of 3 parties have to agree for the transaction to happen. Thus, if the winner agrees and the arbitrator also agrees, the transactions is conducted. It's a cryptographically secure agreement.
What if the arbitrator is colluding with the loser?
This problem is not solved via 2of3 transactions.
It can be partially mitigated by requiring multiple arbitrators (e.g. a 4/5 transaction with 3 hopefluly independent arbitrators).
Unfortunately, there's no really good way of establishing that two pseudonyms are not held by the same person, in a decentralized system. Doubly so when legal enforcement isn't available. Of course abuse is harder the more arbitrators you incorporate, but expense and difficulty are higher as well.
That's a human problem, not a Bitcoin problem.