Hedge Funds Conventional vs Decentralized, Explained

6.

We can break down the involved economics in three parts.

• Network Effects
• Participation
• Reward Distribution

Let’s crack each of them one by one.

Network Effects

The sole aim to open up any decision-making to the entire world is to attract a large number of people to work on it. The network effects, which means the system will become better as more people join in, must be made part of the whole economic model.

The economics must not be designed in a manner such that participants start to view each other as competitors. If that happens, they will try to make it difficult for new entrants to come in and work towards forcing out the existing ones. No one would desire such a situation - neither the fund nor the investors.

Ideal economics would be such that current participants invite more participants in the network. If not perfect, an economics that does not make a member compete against the others would work too.

Participation

Talking of networks, no two members in a network are equal. Each member contributes differently, and that’s how they should be treated.

One of the popular ideas is to maintain the reputation of each participant in the network, and have their votes (bets) evaluated in the light of their reputation. A member with higher reputation will gain more weight for his/her bet as compared to one with a lower reputation. One with zero reputation (or a minimum threshold) is as good as nothing.

Another popular idea is to allow each participant to bet some of their stakes (earnings) along with their bets. The size of their stakes will directly reflect how confident they are in their bets. If a bet yield returns a positive outcome, the one who placed it will be rewarded. If negative, the amount he/she bet would be destroyed.

Bets with higher stakes might be given more weight because that would mean that the participant didn’t just randomly guess.

Rewards

Just as no two members are equal, no two rewards are equal. Rewards might be a function of the reputation of a participant, the stakes he/she made a bet with or the return that his/her bets yielded.

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