In particular, do you see downside risks that I’ve overlooked, i.e. risks that are not merely like a failure of the project but create net harm?
Related to what you wrote under the “General Use” section, I think we should consider the risks from funding “very risky altruistic projects” that are actually net-negative, even though they have a chance of ending up being extremely beneficial. The root of the problem here is that certificate shares can never have a negative market price, even if the underlying charity/project/intervention ends up being extremely harmful. So from the perspective of a certificate trader, their financial risk from their purchase is limited to the amount they invest, while their upside is unlimited. In other words, the expected future price of a certificate share (and thus its price today) can be high even if everyone thinks that the underlying charity/project/intervention has a very negative expected value.
Is it possible to make it so that the estimation of the share value, from the perspective of certificate traders, will somehow account for the historical downside risks of the charity/project/intervention? (Even if by now the downside risks no longer exist and the charity/project/intervention ended up being extremely beneficial.)
Hmm, this seems tricky. In principle, not only should the price be allowed to go negative, it should not be bounded below at all, and certificate holders could have a debt for holding certificates with negative value.
Is it possible to create certificates for the negative of their expected impact, too, and tie them together in the right way?
I’m thinking like in some betting markets, if you hold 1 share for each of the outcomes, you can destroy them and get their total value, e.g. $1 by design in some markets. Or like perpetual futures in crypto.
Maybe you would also need to put up collateral to participate in these markets, and holders of the regular certificates could be forced to pay interest to holders of the negative certificates when the (net) price is negative or get margin called (and vice versa).
Token lending seems like a really good thing here since it would allow people to short and it would generate passive income for hodlers. Since the tokens will be fairly obscure compared to BTC or USDC, the interest will be high, provided there is any interest in shorting in the first place, right? So the shares of controversial projects like playpumps will yield high interest but will remain cheap while, say, AMF shares will yield low interest but appreciate. I’ll need to think about whether that’s good. And what the interest currency should be.
Perpetual futures would be another proven solution to this problem. Bonfida already offers three of them based on Serum, so they seem like an obvious partner to try to get on board with this. Moët is another one but hasn’t launched yet. Considering that Bonfida only has three and they have low volume, I suspect that it’ll be hard to get this off the ground…
A completely out-there idea: Instead of just having one dimension – price up or down, crudely representing positive impact – you could have a multidimensional market. A charity could get their token listed on markets of happiness/USDC, suffering-reduction/USDC, eudaimonia/USDC, edification/USDC, progress/USDC, existential-safety/USDC, experience/USDC, etc., so a token/USDC market with many dimensions. Then traders could buy or sell arbitrary vectors on that market, and their PnL could be something like the cosine similarity to the current multidimensional market price times their investment. But that would require a lot of liquidity since an order can’t go through if even along one dimension there are not enough offers at the price. In any case, just a random phantasy, not actionable for me. xD
That’s an interesting line of thought. Some potential problems:
There may be a wealthy actor that doesn’t like a certain net-positive intervention (e.g. because they are a company that tries to avoid the regulation that the intervention aims to impose). Such an actor can attack the “positive shares” by buying all the “negative shares” and then artificially making their price arbitrarily high (by trading with themselves).
A more speculatively concern (not specific to your idea): Suppose that most traders would believe that: conditional on an existential catastrophe happening, owning the right certificate shares is less important. This may cause traders to give less weight to downside risks when making their decisions. (RowanBDonovan mentioned this issue here.)
Could 1 already be done? They could short the impact certificates, and even inflate the certificate price for oppositional work by trading it with themselves. An efficient impact certificate market should have the latter cause downward price pressure on the certificates they want to short, right?
This leads to an interesting question: how should certificates/organizations working exactly against each other be priced together in an efficient market? Presumably their market caps should be negatively correlated. Would an efficient market ensure one has a market cap near 0 (and so be drained of resources from the market)?
And then maybe this gives us a solution to the original problem without the need for artificially introducing something like negative impact certificates: if the expected value were negative, negative certificates can be introduced naturally and someone can start an oppositional organization or otherwise start doing oppositional work.
There might be reasons to think one side is more efficient than the other at achieving their desired outcome, though. I’m not sure what implications this would have.
I think “oppositional work” can’t always serve as a way to mitigate the harm of a net-negative projects (e.g. it doesn’t seem obvious what the “oppositional work” is for a net-negative outreach intervention).
Simply shorting shares doesn’t seem to me like a solution either. Suppose traders anticipate that the price of the share will be very high at some point in the future (due to the chance that the project ends up being very beneficial). Shorting the share will not substantially affect its price if the amount of money that participating traders can invest is sufficiently large.
Oh wow, yes, thank you! That disconnect between distributions – one symmetrical, the other roughly log-normal – strikes me as very important and dangerous!
This “ex post penalty” that you suggest would be great… I’ll think about things like offering standard (non-inverted) perpetual futures to make it easy to make a lot of money by shorting risky projects; investing through shorting tokenized public bads or world suck; making robustness against downside risks part of the intervention share governance; and whatever else one might do against this problem.
Re the shorting related ideas: maybe you’re thinking about mechanisms that I’m not familiar with, but I don’t currently see how these approaches can help here. Certificate shares for a risky, net-negative intervention can have a very high value according to a correct fundamental analysis (due to the chance that the intervention will end up being very beneficial). In such cases traders who would “bet against the certificate” will lose money in expectation.
Yes. I think we have different types of asymmetries in mind here. I can see three types at the moment, but maybe there are more that I’m overlooking? How do you define “net-negative” if not in terms of expected value? Stochastic dominance? Or do you mean that the ex ante expected value of an intervention can be great even though its value is net-negative ex post?
Different asymmetries that come to mind:
Investors should be able to short just as easily as they can long, and their profits from correctly predicting downside should be just as unbounded as their profits from correctly predicting upside. This can be approximated with borrowing and lending or with a perpetual future. The first approach requires that someone offers the tokens for lending and that the short trader is ready to pay interest on them. The second only has minor issues that I’m aware of (e.g., see Calstud29’s comment), so that, I think, would be a great feature. Then again the ability to lend tokens that you have would create an incentive to buy and hold.
Profit-oriented investors only care about profits that they make in futures in which they can spend them. So if a trader thinks that a project is vastly net negative, shorts it, then the news spreads (maybe aided by the proof that traders are putting their money where their mouth is, namely in a short), and the project is discontinued before the risk materializes, then everything is fine. But if a trader shorts the project, few others follow the lead, and then we go extinct because of the project, the mechanism failed. So in particular traders who don’t have a big audience will the uninterested in shorting bad projects. I don’t know how to solve that elegantly but getting sophisticated altruists to vote on what projects to include in intervention shares can serve to include only fairly robust projects (to the best of our current knowledge).
Various ethical asymmetries, such as how to weight suffering vs. happiness, making happy people vs. making people happy, maybe stuff like how to think about logical counterfactual, etc. I have various opinions and intuitions about these, but I (tentatively) feel like if I built nudges into the marketplace that push in one direction or another, half the potential user base would perceive the market as unfair and acausally somewhere in the universe someone very much like me would build a marketplace where the nudges push in the opposite direction. So I feel like it’s more fair to resolve these through discussions and trade than through marketplace mechanisms.
If you were just referring to the ex ante vs. ex post distinction, then I think it’s fair that people can get lucky by betting on risky projects (risky in the sense of downside risks) because (1) they need to bet on a lot of them to get lucky, so their contribution to each is smaller, and (2) they can get equally lucky by betting against risky projects. I don’t want people to support risky projects, but so long as we can figure out problems 1 and 2 above, the share prices of risky projects should remain quite low.
Or are you thinking of problems along the lines of the St. Petersburg game? I.e. the expected value is unbounded so the share price of a St. Petersburg game charity should go to infinity to the degree the available capital allows? I don’t think that will happen. The upside of various technology companies is virtually unbounded due to transformative AI and yet the share price remains finite and the market capitalization well below the capital that is available in the world. Admittedly, it makes me uncomfortable to rely on “It’s not happening now, so it’s unlikely to happen in the future,” but in this case it seems like a pretty strong reason to me…
Here’s a concrete example: Suppose there’s 50% chance that next month a certain certificate share will be worth $10, because the project turns out to be beneficial; and there’s 50% chance that the share will be worth $0, because the project turns out to be extremely harmful. The price of the share today would be ~$5, even though the EV of the underlying project is negative. The market treats the possibility that “the project turns out to be extremely harmful” as if it was “the project turns out to be neutral”.
How do you define “net-negative” if not in terms of expected value? Stochastic dominance? Or do you mean that the ex ante expected value of an intervention can be great even though its value is net-negative ex post?
These seem like very important questions. I guess the concern I raised is an argument in favor of using ex ante expected value. (Though I don’t know with respect to what exact point in time. The “IPO” of the project?). And then there can indeed be a situation where shares of a project, that is already known to be a failure that caused harm, are traded at a high price (because the project was really a good idea ex ante).
Investors should be able to short just as easily as they can long, and their profits from correctly predicting downside should be just as unbounded as their profits from correctly predicting upside. This can be approximated with borrowing and lending or with a perpetual future. The first approach requires that someone offers the tokens for lending and that the short trader is ready to pay interest on them. The second only has minor issues that I’m aware of (e.g., see Calstud29’s comment), so that, I think, would be a great feature. Then again the ability to lend tokens that you have would create an incentive to buy and hold.
I don’t see how letting traders bet against a certificate by shorting its shares solves the issue that I raised. Re-using my example above: Suppose there’s 50% chance that next month a share will be worth $10 (after the project turns out to be beneficial) and 50% chance that the share will be worth $0 (after the project turns out to be extremely harmful). The price of the share today would be ~$5. Why would anyone short these shares if they are currently trade at $5? Doing so will result in losing money in expectation.
Perhaps the mechanism you have in mind here is more like the one suggested by MichaelStJules (see my reply to his comment).
Profit-oriented investors only care about profits that they make in futures in which they can spend them.
That’s a great point. This also applies to traders who go long on a share (potentially making them give less weight to the downside risks of the project).
getting sophisticated altruists to vote on what projects to include in intervention shares can serve to include only fairly robust projects (to the best of our current knowledge).
I think something like this can potentially be a great solution. Though there may be a risk that such a market will cause other crypto enthusiasts to create competing markets that don’t have this mechanism (“our market is truly decentralized, not like that other one!”).
If you were just referring to the ex ante vs. ex post distinction, then I think it’s fair that people can get lucky by betting on risky projects (risky in the sense of downside risks)
My concern here is about net-negative projects, not risky projects in general (risky projects can be net-positive).
Suppose there’s 50% chance that next month a share will be worth $10 (after the project turns out to be beneficial) and 50% chance that the share will be worth $0 (after the project turns out to be extremely harmful). The price of the share today would be ~$5. Why would anyone short these shares if they are currently trade at $5? Doing so will result in losing money in expectation.
Ah, you’re right. Not sure why I was so confused about this before.
I might’ve implicitly been thinking about the case where the bad news about the intervention gradually comes to light (in the worlds where it turns out to be bad) and the shorter regularly increases their short to maintain the same leverage while the market drops. Would that work?
I’ve been under the impression that that’s how the HEDGE tokens work, specifically with a rebalancing interval of one day or less (extra rebalancing during the day in case of high volatility), but the result is weird… DMG dropped 77% all at once on Feb. 5, 2021, so I would’ve expected DMGHEDGE to go up 77%? Instead it also dropped 55%. Maybe there was not enough buy-side liquidity to rebalance properly because everyone just wanted to sell?
I wonder if negative impact tokens would work or would fall short for similar reasons. Is there some sort of software for simulating markets? Otherwise I might just try to put together a little custom agent-based model for this.
I wonder, what would happen if we created a USDC/TOKEN market instead of a TOKEN/USDC market?
That’s a great point. This also applies to traders who go long on a share (potentially making them give less weight to the downside risks of the project).
Yeah, sadly.
I think something like this can potentially be a great solution. Though there may be a risk that such a market will cause other crypto enthusiasts to create competing markets that don’t have this mechanism (“our market is truly decentralized, not like that other one!”).
Hmm, it would be completely decentralized. Only the “ICO” would consist of giving the token to specific charities and funds, which would thereby obtain particular voting rights. If a project wanted to avoid that, they could exclude the funds, but they can’t exclude the charities as that would defeat the purpose of the token…
But that’s not much consolation. A lot of the charities I do want to see supported run interventions with potentially vast downside risks, in my opinion. I don’t know if they really have vast or rather limited downside risks, so I would like the market to know more than me about that, not less.
Related to what you wrote under the “General Use” section, I think we should consider the risks from funding “very risky altruistic projects” that are actually net-negative, even though they have a chance of ending up being extremely beneficial. The root of the problem here is that certificate shares can never have a negative market price, even if the underlying charity/project/intervention ends up being extremely harmful. So from the perspective of a certificate trader, their financial risk from their purchase is limited to the amount they invest, while their upside is unlimited. In other words, the expected future price of a certificate share (and thus its price today) can be high even if everyone thinks that the underlying charity/project/intervention has a very negative expected value.
Is it possible to make it so that the estimation of the share value, from the perspective of certificate traders, will somehow account for the historical downside risks of the charity/project/intervention? (Even if by now the downside risks no longer exist and the charity/project/intervention ended up being extremely beneficial.)
Agreed!
Hmm, this seems tricky. In principle, not only should the price be allowed to go negative, it should not be bounded below at all, and certificate holders could have a debt for holding certificates with negative value.
Is it possible to create certificates for the negative of their expected impact, too, and tie them together in the right way?
I’m thinking like in some betting markets, if you hold 1 share for each of the outcomes, you can destroy them and get their total value, e.g. $1 by design in some markets. Or like perpetual futures in crypto.
Maybe you would also need to put up collateral to participate in these markets, and holders of the regular certificates could be forced to pay interest to holders of the negative certificates when the (net) price is negative or get margin called (and vice versa).
Token lending seems like a really good thing here since it would allow people to short and it would generate passive income for hodlers. Since the tokens will be fairly obscure compared to BTC or USDC, the interest will be high, provided there is any interest in shorting in the first place, right? So the shares of controversial projects like playpumps will yield high interest but will remain cheap while, say, AMF shares will yield low interest but appreciate. I’ll need to think about whether that’s good. And what the interest currency should be.
Perpetual futures would be another proven solution to this problem. Bonfida already offers three of them based on Serum, so they seem like an obvious partner to try to get on board with this. Moët is another one but hasn’t launched yet. Considering that Bonfida only has three and they have low volume, I suspect that it’ll be hard to get this off the ground…
A completely out-there idea: Instead of just having one dimension – price up or down, crudely representing positive impact – you could have a multidimensional market. A charity could get their token listed on markets of happiness/USDC, suffering-reduction/USDC, eudaimonia/USDC, edification/USDC, progress/USDC, existential-safety/USDC, experience/USDC, etc., so a token/USDC market with many dimensions. Then traders could buy or sell arbitrary vectors on that market, and their PnL could be something like the cosine similarity to the current multidimensional market price times their investment. But that would require a lot of liquidity since an order can’t go through if even along one dimension there are not enough offers at the price. In any case, just a random phantasy, not actionable for me. xD
That’s an interesting line of thought. Some potential problems:
There may be a wealthy actor that doesn’t like a certain net-positive intervention (e.g. because they are a company that tries to avoid the regulation that the intervention aims to impose). Such an actor can attack the “positive shares” by buying all the “negative shares” and then artificially making their price arbitrarily high (by trading with themselves).
A more speculatively concern (not specific to your idea): Suppose that most traders would believe that: conditional on an existential catastrophe happening, owning the right certificate shares is less important. This may cause traders to give less weight to downside risks when making their decisions. (RowanBDonovan mentioned this issue here.)
Could 1 already be done? They could short the impact certificates, and even inflate the certificate price for oppositional work by trading it with themselves. An efficient impact certificate market should have the latter cause downward price pressure on the certificates they want to short, right?
This leads to an interesting question: how should certificates/organizations working exactly against each other be priced together in an efficient market? Presumably their market caps should be negatively correlated. Would an efficient market ensure one has a market cap near 0 (and so be drained of resources from the market)?
And then maybe this gives us a solution to the original problem without the need for artificially introducing something like negative impact certificates: if the expected value were negative, negative certificates can be introduced naturally and someone can start an oppositional organization or otherwise start doing oppositional work.
There might be reasons to think one side is more efficient than the other at achieving their desired outcome, though. I’m not sure what implications this would have.
EDIT: Previously brought up here.
I think “oppositional work” can’t always serve as a way to mitigate the harm of a net-negative projects (e.g. it doesn’t seem obvious what the “oppositional work” is for a net-negative outreach intervention).
Simply shorting shares doesn’t seem to me like a solution either. Suppose traders anticipate that the price of the share will be very high at some point in the future (due to the chance that the project ends up being very beneficial). Shorting the share will not substantially affect its price if the amount of money that participating traders can invest is sufficiently large.
Oh wow, yes, thank you! That disconnect between distributions – one symmetrical, the other roughly log-normal – strikes me as very important and dangerous!
This “ex post penalty” that you suggest would be great… I’ll think about things like offering standard (non-inverted) perpetual futures to make it easy to make a lot of money by shorting risky projects; investing through shorting tokenized public bads or world suck; making robustness against downside risks part of the intervention share governance; and whatever else one might do against this problem.
Re the shorting related ideas: maybe you’re thinking about mechanisms that I’m not familiar with, but I don’t currently see how these approaches can help here. Certificate shares for a risky, net-negative intervention can have a very high value according to a correct fundamental analysis (due to the chance that the intervention will end up being very beneficial). In such cases traders who would “bet against the certificate” will lose money in expectation.
Yes. I think we have different types of asymmetries in mind here. I can see three types at the moment, but maybe there are more that I’m overlooking? How do you define “net-negative” if not in terms of expected value? Stochastic dominance? Or do you mean that the ex ante expected value of an intervention can be great even though its value is net-negative ex post?
Different asymmetries that come to mind:
Investors should be able to short just as easily as they can long, and their profits from correctly predicting downside should be just as unbounded as their profits from correctly predicting upside. This can be approximated with borrowing and lending or with a perpetual future. The first approach requires that someone offers the tokens for lending and that the short trader is ready to pay interest on them. The second only has minor issues that I’m aware of (e.g., see Calstud29’s comment), so that, I think, would be a great feature. Then again the ability to lend tokens that you have would create an incentive to buy and hold.
Profit-oriented investors only care about profits that they make in futures in which they can spend them. So if a trader thinks that a project is vastly net negative, shorts it, then the news spreads (maybe aided by the proof that traders are putting their money where their mouth is, namely in a short), and the project is discontinued before the risk materializes, then everything is fine. But if a trader shorts the project, few others follow the lead, and then we go extinct because of the project, the mechanism failed. So in particular traders who don’t have a big audience will the uninterested in shorting bad projects. I don’t know how to solve that elegantly but getting sophisticated altruists to vote on what projects to include in intervention shares can serve to include only fairly robust projects (to the best of our current knowledge).
Various ethical asymmetries, such as how to weight suffering vs. happiness, making happy people vs. making people happy, maybe stuff like how to think about logical counterfactual, etc. I have various opinions and intuitions about these, but I (tentatively) feel like if I built nudges into the marketplace that push in one direction or another, half the potential user base would perceive the market as unfair and acausally somewhere in the universe someone very much like me would build a marketplace where the nudges push in the opposite direction. So I feel like it’s more fair to resolve these through discussions and trade than through marketplace mechanisms.
If you were just referring to the ex ante vs. ex post distinction, then I think it’s fair that people can get lucky by betting on risky projects (risky in the sense of downside risks) because (1) they need to bet on a lot of them to get lucky, so their contribution to each is smaller, and (2) they can get equally lucky by betting against risky projects. I don’t want people to support risky projects, but so long as we can figure out problems 1 and 2 above, the share prices of risky projects should remain quite low.
Or are you thinking of problems along the lines of the St. Petersburg game? I.e. the expected value is unbounded so the share price of a St. Petersburg game charity should go to infinity to the degree the available capital allows? I don’t think that will happen. The upside of various technology companies is virtually unbounded due to transformative AI and yet the share price remains finite and the market capitalization well below the capital that is available in the world. Admittedly, it makes me uncomfortable to rely on “It’s not happening now, so it’s unlikely to happen in the future,” but in this case it seems like a pretty strong reason to me…
Here’s a concrete example: Suppose there’s 50% chance that next month a certain certificate share will be worth $10, because the project turns out to be beneficial; and there’s 50% chance that the share will be worth $0, because the project turns out to be extremely harmful. The price of the share today would be ~$5, even though the EV of the underlying project is negative. The market treats the possibility that “the project turns out to be extremely harmful” as if it was “the project turns out to be neutral”.
These seem like very important questions. I guess the concern I raised is an argument in favor of using ex ante expected value. (Though I don’t know with respect to what exact point in time. The “IPO” of the project?). And then there can indeed be a situation where shares of a project, that is already known to be a failure that caused harm, are traded at a high price (because the project was really a good idea ex ante).
I don’t see how letting traders bet against a certificate by shorting its shares solves the issue that I raised. Re-using my example above: Suppose there’s 50% chance that next month a share will be worth $10 (after the project turns out to be beneficial) and 50% chance that the share will be worth $0 (after the project turns out to be extremely harmful). The price of the share today would be ~$5. Why would anyone short these shares if they are currently trade at $5? Doing so will result in losing money in expectation.
Perhaps the mechanism you have in mind here is more like the one suggested by MichaelStJules (see my reply to his comment).
That’s a great point. This also applies to traders who go long on a share (potentially making them give less weight to the downside risks of the project).
I think something like this can potentially be a great solution. Though there may be a risk that such a market will cause other crypto enthusiasts to create competing markets that don’t have this mechanism (“our market is truly decentralized, not like that other one!”).
My concern here is about net-negative projects, not risky projects in general (risky projects can be net-positive).
Ah, you’re right. Not sure why I was so confused about this before.
I might’ve implicitly been thinking about the case where the bad news about the intervention gradually comes to light (in the worlds where it turns out to be bad) and the shorter regularly increases their short to maintain the same leverage while the market drops. Would that work?
I’ve been under the impression that that’s how the HEDGE tokens work, specifically with a rebalancing interval of one day or less (extra rebalancing during the day in case of high volatility), but the result is weird… DMG dropped 77% all at once on Feb. 5, 2021, so I would’ve expected DMGHEDGE to go up 77%? Instead it also dropped 55%. Maybe there was not enough buy-side liquidity to rebalance properly because everyone just wanted to sell?
I wonder if negative impact tokens would work or would fall short for similar reasons. Is there some sort of software for simulating markets? Otherwise I might just try to put together a little custom agent-based model for this.
I wonder, what would happen if we created a USDC/TOKEN market instead of a TOKEN/USDC market?
Yeah, sadly.
Hmm, it would be completely decentralized. Only the “ICO” would consist of giving the token to specific charities and funds, which would thereby obtain particular voting rights. If a project wanted to avoid that, they could exclude the funds, but they can’t exclude the charities as that would defeat the purpose of the token…
But that’s not much consolation. A lot of the charities I do want to see supported run interventions with potentially vast downside risks, in my opinion. I don’t know if they really have vast or rather limited downside risks, so I would like the market to know more than me about that, not less.