I Made a Crazy Crypto "Investment" So You Don't Have To!
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I Made a Crazy Crypto "Investment" So You Don't Have To!

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Jul 19, 2021
TL;DR: I bought "Yes" options on the "Will EIP-1559 be implemented on the Ethereum mainnet before August 5, 2021?" market on Polymarket.
 
First, some background information needed to understand all the details of this post. This may be trivial for some of you, but I want to provide it in case it's not.
 

Ethereum

Ethereum is (in my opinion) the greatest blockchain in existence. Bitcoin was revolutionary for introducing blockchain technology, but Ethereum took this a step further, and empowered developers to harness the power of blockchain through "smart contracts," which are building blocks for projects that take advantage of the benefits of blockchain. Now, countless products and tools have been built on top of Ethereum, and add tremendous value to the world.
 

Block Time

Ethereum is a blockchain, quite literally a chain of blocks. A block is a collection of transactions that are verified to be true by the members of the network. Blocks are created by "miners," which are people racing to solve computationally intensive math problems. The amount of computing power trying to solve these problems is constantly changing as new miners join, or existing miners leave. On its own, this would lead to dramatically varied block times, which means it'd be nearly impossible to predict when an arbitrary future block will occur. However, uniformity in block time is advantageous for several reasons, so Ethereum automatically changes the difficulty of the math problems that miners are trying to solve in order to stabilize block times. If blocks are being solved too quickly, difficulty increases for the next block. If blocks are taking too long to be solved, difficulty is decreased. This still leaves some variability, but makes it more predictable when an arbitrary future block will occur.
 

EIP-1559

EIP-1559 is an upgrade to Ethereum that it scheduled to go live on the Ethereum mainnet at block 12,965,000. If you don't know what any of that means, it's ok, and frankly, not that important for this post (though I'll explain it a bit). Ethereum developers intended for this to occur sometime on August 4th. This upgrade has been loosely scheduled, but delayed several times over the past month. This is the first time that a specific block number has been provided for the transition.
 

Binary Options

Binary options give investors the opportunity to bet on binary events, that is events with two concretely defined possible outcomes. Just like the stock market sets the value of a share of company's stock, a binary options market (also known as a prediction market), sets the value of both outcomes. The sum of the options adds up to $1, and as users buy up more of a given option, it's price increases, while simultaneously decreasing the price of the other option (to keep the sum at $1).
 
To further clarify, a prediction market could exist on whether or not the Cavs will win the 2026 NBA Championship. If the market finds this to be highly unlikely, the cost of a "Yes" share might be 5 cents, which would make a share of "No" 95 cents. These numbers literally correlate to percentage points of probability, so in this example, the market would be saying the Cavs have a 5% chance. If the Cavs make some big trades, and win a lot of games, the demand for "Yes" shares might increase, driving up the price, while simultaneously decreasing the price of "No" shares. If (when) the Cavs win the championship, holders of "Yes" shares receive $1/share, while holders of "No" shares receive nothing.
 

Expected Value of a Bet

If given the opportunity to pay $1 to flip a fair coin and receive $5 if it landed on heads, and nothing if it landed on tails, would you take the deal? Of course you would. Your expected value, which is the sum of the products of likelihood and outcome, is hugely positive for this bet. 50% of the time, you'll lose $1, and the other 50% of the time, you'll gain $4. Your expected value is (.5 x -1) + (.5 x 4), or $1.50. A bet having an expectancy (expected value) of even just 1 cent would be worth making.
 

The "Investment"

Polymarket is a site that offers investors the opportunity to participate in numerous prediction markets. While browsing, I came across a market titled Will EIP-1559 be implemented on the Ethereum mainnet before August 5, 2021?. "Yes" shares were priced at ~6 cents, which baffled me because as far as I knew, the upgrade was to go live on sometime within August 3-5. This bet offered ~17:1 odds, which means that for every $1 bet, $17 is won if the market resolves to "Yes". Put differently, this meant that the market believed there was a 6% chance of the upgrade succeeding before 4:00 AM UTC on August 5th (Midnight Eastern Time).
 
So I set out trying to understand why in the world the market was so skeptical, as I hadn't heard any pessimistic news. I posted in the Ethereum Developers Discord server, where someone (not official, but knowledgeable) made it clear that the upgrade was performing well on test networks, and everyone close to the project was confident that it would hit the mainnet at block 12,965,000 as expected. With this in mind, I knew the next thing I'd have to confirm is when that block was expected to hit. Thankfully that was "easy." I found two counters on official, reputable Ethereum info sites, EtherScan, which is the official visualizer of the Ethereum blockchain, and NiceHash, one of the most popular sources for Ethereum mining data. There was a catch though.... EtherScan forecasted block 12,965,000 to hit 2 hours before the deadline, while NiceHash had it coming in 3 hours after. To make matters more complicated, as I tracked both countdowns over just 24 hours, they varied as much as 5 hours.
 
Even with the massive uncertainty and nonzero likelihood of the upgrade hitting late, I believe that buying "Yes" shares had a positive expectancy. I had the opportunity to buy these shares for just 6 cents, which offers 16.7:1, so as long as the probability that the block hits prior to the resolution is greater than 6%, this is a winning bet in the long run. If the average block time (the amount of time it takes Ethereum miners on average to mine 1 block) is ≤ 13.316 seconds, the upgrade will hit prior to the market resolution time. Over the past 50 days, the average block time has been 13.234 seconds, but it's averaged 13.334 seconds over the past 10 days.
 
I'll be watching both countdowns like a hawk and crossing my fingers!
 
This isn't financial advice, and I don't recommend you make the same play, but if you have questions, feel free to reach out!