We can ameliorate some of DPM’s less-than-expected payouts by automatically matching a portion of new bets against previous bets, and moving those into side pools that pay out to the winner.
To do this, we rely on a new DPM transaction.
To short sell an outcome, or buy negative shares, you have someone who owns shares sell them now. This produces money, which you stash in a side pool, and updates the DPM to lower the probability of that outcome.
You would then contribute to the side pool enough money to pay out proper winnings if the outcome is chosen (M$ 1 per share). Thus, if the outcome happens, the pool can go to the original purchaser of the shares, and if the outcome does not happen, the pool goes to you.
We want DPM to better approximate fixed payouts. One way to do this is to match more of the YES and NO buys together into side pools, so that a greater share of the trades are guaranteed to have correct payouts.
One proposal is to take 40% of each buy and match it into a side pool by selling the opposite outcome.
If you buy M$ 10 of YES, we’d break that into two steps:
The effect of this transaction is
We don’t have to match specific individuals for this to work. The shares sold could be owned by anyone or by multiple people, as long as the side pool has enough money to payout the winnings for the shares.
When the market is resolved, we can merge the side pools with the DPM pool, and pay out the combined pool as before—proportionally to owners of the winning shares.