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Pitch

Multiply prizes for breakthrough technologies by betting against them.


Description

Summary

In the absence of political breakthroughs, solving climate change may require technological breakthroughs. For example, reliable carbon-free energy sources cheaper than fossil fuels would remove the need for a price on carbon.

Unfortunately, funding those breakthroughs is sometimes difficult. High-risk, high-reward technology development is often poorly funded by governments and private investors. 

Historically, prizes have worked much better. One was the Ortieg Prize, which was won by Charles Lindbergh on his famous flight. An even earlier example was the Longitude Prize, offered by the British government in 1714 for a practical means of determining a ship's longitude. Present-day prizes include the Methuselah Mouse Prize and the NASA Centennial Challenges.

http://en.wikipedia.org/wiki/Orteig_Prize

http://en.wikipedia.org/wiki/Longitude_prize

http://en.wikipedia.org/wiki/Ansari_X_Prize

But the most famous in modern times was the Ansari X-Prize, which awarded $10 million for the first private company to put a human in space.

The prize was funded by an insurance plan, which would pay if the prize were won. The X-Prize Foundation had to pay premiums, which were lost whether the prize was won or not. However, by doing this they were able to fund a much larger prize.

On top of that, the total amount of R&D money spent by contestants was several times greater than the prize itself. The winning team spent more money than the prize amount all by itself, calculating that it could use the technology and notoriety it developed as the foundation of a new business.

Taking these multipliers together, contestants spent about a hundred times more money on R&D than the foundation spent financing the prize.


Category of the action

Reducing emissions from electric power sector.


What actions do you propose?

Build a website that allows anyone to set up an innovation prize. Like the X-Prize, it must have a deadline and clear, unambiguous criteria for success. The prize should be for something quite difficult, so most people think it's unlikely to be achieved.

To fund the prize, set up a betting market. People can bet one whether the prize will be won. Odds are set according to how much people bet on each side.

Let's say that for everyone who thinks the prize will succeed, ten people think it will fail. If everyone bets equal amounts, betting odds will be ten to one against.

Betting against the prize

"Detractors" bet that the prize will not be won. Since the odds are 10-1 against, you will get a 10% return on your investment if you win the bet. Detractors play the same role as the insurance company in the original X-Prize.

Betting for the prize

"Supporters" lose their money no matter what. The bet is their contribution to funding the prize. They play the same role as the X-Prize Foundation, in the original X-Prize.

If the prize fails, their money goes to the detractors (just as the foundation's premiums went to the insurance company). If the prize succeeds, the prize money comes from the detractors. Because of the 10-1 odds, the contributions of supporters are multiplied by ten.

In sum, if you put up $100 to fund a prize at 10-1, then your bet matches $1000 which was bet against the prize. If the prize is won, the winner gets all the money, or $1100, instead of just your $100. If nobody wins the prize, those who bet against you get your $100.

Disadvantages

Supporters lose their money even if the technology they're funding doesn't succeed. Instead of paying money only if they achieve their objective, they risk paying money and getting nothing.

Advantages

Supporters can multiply their investment, increasing the chance that the prize will be successful.

Supporters can also fund multiple projects with less risk. Let's say you have $1000 to donate, and you are interested in ten projects, each with a ten percent chance of success.

You can pledge $100 to each project, but most likely only one or two projects will be successful, so you end up donating much less than you wished.

You can pledge $1000 to each of the ten projects, with expectation that one will be successful. However, it's possible that several will be successful, putting you on the hook for much more than you wished.

By using the betting system, you can simply donate $1000 up front. The risk is transferred to the detractors, who are compensated for their risk by the chance of personal profit (like anyone else who makes a bet).

Comparison to other systems

Prediction markets such as Intrade are similar to this system. However, Intrade works somewhat differently. Bets are structured as resalable futures contracts, with payoffs that change over time as trades are made. If we did it that way, then as contestants got closer to winning the prize, the odds would go down. By the time the prize was won, there'd be little money left for it. (Most of the money would have gone to speculators instead.)

Parimutuel betting is another system in which the final payout is determined at the end. 

http://en.wikipedia.org/wiki/Parimutuel_betting

In our case, we need to use fixed-odds betting, with the final payout agreed-upon between bettors at the time the bet is made. New bets may be made at any time before the deadline, with different odds, but existing bets keep their original odds. This way the prize amount can only go up, not down.

http://en.wikipedia.org/wiki/Fixed-odds_betting


Who will take these actions?

The general public will contribute and bet. The real work will be done by researchers in the appropriate fields, who are willing to take on high-risk projects. If a goal is considered easy to achieve, there won't be much of a bet multiplier.

If there is a straightforward, known path to success, there's little advantage to having lots of companies working in parallel on different approaches. It may be more efficient just to fund one project directly.

If a successful project can bring immediate commercial profit, a prize is probably unnecessary. Commercial incentives alone will be sufficient.

Therefore, ideal goals are those which are difficult to achieve, with many possible paths to success, and which will require further development after the prize is won to bring to full commercialization.

An example of this sort of goal is breakeven nuclear fusion. Most people think it's unlikely to be achieved in the near future (except perhaps by ITER). There are many different approaches to achieve it, currently being developed in parallel. After net energy is achieved, further development will be required to engineer a production-ready power plant. 

A series of prizes could be created, with transitional milestones along the way to breakeven fusion, so successful researchers can be rewarded as they go with funds for the next steps.

Prizes could be offered for many other energy-related goals, including energy storage or efficient production of liquid fuels from hydrogen and CO2 in the air or seawater. Anything with a large potential benefit that's not already being heavily researched by private industry could make a good prize.


Where will these actions be taken?

In the United States, anti-gambling laws may prevent a service like this from being created. However, online gambling is legal in many countries.

Intrade was sued in the U.S. by commodity futures regulators, and no longer allows U.S. customers to trade with real money.

http://en.wikipedia.org/wiki/Intrade

So the system would have to be run from another country besides the United States, probably best if a technologically-advanced nation with an entrepreneurial culture. 

It's possible that supporters and project contestants could be U.S. based. Also, U.S. citizens can lobby to reform the law to allow prediction markets, which were not conceived of when the gambling laws were enacted.

If the system is based on Ethereum (see the Costs section), then administration would be completely distributed.


How much will emissions be reduced or sequestered vs. business as usual levels?

Since the purpose of this proposal is to fund high-risk, high-reward technological research, it's difficult to predict how much emissions may be reduced. Even if the system is successful, the research may not pan out. On the other hand, the impact of true breakthroughs could be profound.


What are other key benefits?

There wouldn't have to be restrictions on the types of projects. The system could assist technological development in fields unrelated to climate, such as medical treatments.

The odds generated by aggregated bets would be the crowd's estimate of the chance that each prize will be won. Sites like Intrade have turned out to be good predictors of election results, so if this holds true for technology, the estimated odds could be useful for policymakers and investors.

Whoever builds the system could profit from service fees.


What are the proposal’s costs?

Initial costs would be similar to other web startups. There'd need to be sufficient marketing to get over the "chicken-and-egg" problem. Aside from infrastructure and marketing, it may be necessary to pay subject-matter experts to evaluate prize claims.

For easier implementation, an option is to build the system on Ethereum, a scriptable cryptocurrency planned for release in Q4 2014. Crowdfunding scripts for Ethereum have already been devised, and amount to about a page of code. To determine whether a prize has been achieved, either a trusted judge (and associated cryptographic key) can be designated for each contest, or in some cases the Schelling mechanism may be sufficient.

The amount of donations to prizes would be up to the general public, which seems to be somewhat willing to donate. In mid-2014, a nuclear fusion experiment raised $180,000 on Indiegogo, and the "solar roadways" project raised $2 million.


Time line

The crowdfunding system could be built very quickly. The timeline for resulting energy technologies would vary depending on the technology.


Related proposals

The 2013 proposal "It's the 21st Century. Where's My Fusion Reactor?" mentioned technology prizes in the context of fusion, though without the crowdsourcing component described here.


References