A Smart Market Toolkit for Cardano

Uber uses auctions to find the best route and match drivers to ride requests. It is a smart-market and oracle that works out the best price for a journey. However as a centralised service, Uber maximises returns to their shareholders at the expense of the drivers and society as a whole.

We are most familiar with auction markets used by eBay, art auction houses, stock exchanges and cryptocurrency trading, whether CeFi or DeFi. These are competitive market designs that maximise profit, not societal benefit. Less well known are auction markets that aim to benefit society as a whole.

Smart-Markets are automated auctions that pool offers and work out the best match, or price, in a way that gives the most benefit to all participants. Paul Milgrom and Robert Wilson won the 2020 Nobel Economics Prize[1] for their pioneering work into auction theory that drives these automated markets. Google Adwords, energy generation, efficient transportation networks such as airport landing slots, internet routing, or Uber and many other gig-economy labour markets benefit from these automated decision-making tools.

The opportunities for smart-markets are both large and varied. Far more than the simple bilateral trading found in competitive markets.

This proposal outlines a T shaped project, going broad on the five key topics that contribute to building smart-markets on Cardano. Emphasising its unique features and amplifying the strategic vision as a financial operating system. We'll be diving deep on a specific application of our auction protocol to illustrate how Cardano's unique features can be used in real-world smart-markets.

A smart-market solution can be applied to problems such as:

• logistics problems for reliable fertiliser distribution in Ethiopia, a complex dynamic market riddled with grift.
• replenish food banks, efficiently distributing nearly expired foods and reducing food waste.
• cooperative housing, or small community-owned solar and wind power generation and battery storage.
• An impact-oriented e-learning platform matching students to course material and tutors.
• provision of biodiversity conservation efforts with contracted and volunteer crowdsourcing.
• stablecoin designs.
• foreign currency exchange with low demand.
• person-to-person sports betting.

The intent of this proposal is to research, design, and prototype a decentralised auction protocol and associated Oracle Pool design. It leverages the work already done by Emurgo Research to enrich and strengthen the economic logic of Stake Pool Operators.

Testing real-world smart-markets is expensive. To make the problem approachable and limit the scope for this proposal, we are using a Trading Card Game, Dark Country [2], as our test use-case. This will demonstrate using Cardano's custom tokens and meta-data support to represent unique items, sometimes called Non-Fungible Tokens (NFT). Custom Tokens and NFTs can be used to represent other tradable assets such as art, shares in layered digital artworks, music rights, or stages in a transportation network.

Our approach will implement the auction protocol on-chain to collect offers and clear them efficiently. Oracles calculate the optimal allocation of all card trades in a transparent manner. The layer-2 prototype will show how game players can strategically stack their decks. Swapping cards anonymously without needing Ada or any other crypto-currency to make the trades.

By prototyping with a trading card game, learning in public, we can iterate faster, learn more and inspire others. The resulting toolkit of learning resources, UI designs, NFT Meta-Data Standards, protocol engineering and prototype Plutus code can be used as the basis to solve complex market allocation problems all over the world.

Team

The team has experience in financial markets software engineering, tech start-ups, Data & Govtech, impact investing, art, music, and education. We are active in organizing legal-tech community and facilitating online communities in gaming and education. The team includes six members established within the Cardano community during fund 2.

RO: Distributed Systems Software Engineer (Financial systems) and Entrepreneur. Co-Founded three start-ups in Financial Data Analytics, International Trade Payments, and Impact Investing. Co-Organises LegalHackers NZ, and advises a Social Entrepreneurship charity.

NH: A Teacher, technology enthusiast and stake pool operator. Nick has worked in semiconductor research and in front-line technical support as well as teaching. Extensive experience with online communities, particularly with gaming and education of non-technical users in block-chain products.

AW: Distributed systems software engineer, mostly in the financial sector in the City of London. Worked at Barclays Capital (credit risk) and LIFFE (derivatives exchange). Also experienced with the hospitality sector.

Full team details are available in also the attached proposal summary document.

We will draw upon other skills including Economist, Data Scientist, UX Designer as needed.

Deliverables

We are leveraging the work already done by IOG and Emurgo, and we will contribute back to the developer ecosystem. If an opportunity presents itself, contributing to the emerging developer portal with the knowledge acquired.

• Research reading bibliography.
• Simulation models using cadCAD, published as Jupyter notebooks.
• Define NFT meta-data standards (draft).
• Plutus code for auction and oracle pool protocols.
• Oracle Pool node software (research quality).
• Trading Card NFTs (that in principle can have a market value)
• UX Prototypes to illustrate market interactions.
• Maintain social media channels Twitter, Telegram, Discord, Youtube.
• Document concepts and progress in blog posts and video explainers.

Documentation will be licensed Creative-Commons CC-BY-SA. Source code will be licensed using an appropriate open-source license, e.g. MIT, and contributions must be contributed patent-free. Code, documentation, and notebooks will be made available on Github.

The roadmap and associated deliverables can be found in the attached proposal summary document.

Risks

1. Team Dynamics: A new team, different time zones and varying commitments.
   Addressed by adding team members that have worked together. To help test team dynamics we worked collaboratively to produce proposal artefacts including proposal video.
2. Key Personnel: Unable to continue with the project.
   Addressed by managing scope, documenting a clear plan and source of material knowledge, collective team learning, and developing in public.
3. Software Dependency: Multi-Asset support and Plutus release are delayed.
   Addressed by prototype work. We are not building production-ready software. Development can use Plutus playground or private test networks.
4. Scope: Too complex and ambitious for team-skill.
   Addressed by making content deliverables introductory level, delivering in stages, and making the deep engineering work very specific.
5. Technical: approach fails, does not work or not useful.
   Addressed by creating two primary sets of deliverables- content, and engineering. Content deliverables are 100% applicable.

Return on Intention

Intention: Construct a toolkit of material that complements the training material from Cardano Foundation and IOG. Focusing on the application- Smart-Market based on Oracle Pool Architecture- rather than learning Plutus/Haskell. Broadly cover topics that highlight the unique features of Cardano with understandable language, and real-world application; presented meaningfully, and done by relatable others. To get people understanding how they can use the unique features of Cardano, to help them to see the possibilities of building on Cardano.

These features include Ouroboros's logical clock, the ExUXTO process-oriented transaction model, native custom tokens and meta-data features for NFTs, Plutus, interestingly combining these - a smart-market design that uses an oracle pool— creating a virtuous loop that enhances the revenue opportunities for Stake-Pool Operators. The motivating problem that Smart-Market's enable is multilateral swaps.

Return: Developers are inspired to leverage the unique features of Cardano, in a way that reinforces the internal economic logic of the Cardano Network. At least one technology start-up (commercial or social) builds upon the work to target a specific market opportunity.

Key Performance Indicators

Key Metric: Project Velocity[3], defined as a combination of base activity metric of commits pulled from Github. Team success metric in achieving short-terms targets of topic content delivery, and community impact metric.

Activity Metrics: captured as project activity in GitHub and cadence of deliverables, a.) Content delivered; b.) Engineering milestones achieved.

Community Metrics: engagement behaviours broken down into four categories[4] for the content we produce, to measure how our work is being spread.

• Validating - views, likes, shares
• Sharing - Tweets, Comments, References in documents.
• Asking & Answering - questions asked and answered across channels
• Exploring - Open-ended questions, and conversations about applications

In addition to content distribution, outreach into other communities will be necessary. For example, we will be actively engaging with the cadCAD and Token Engineering communities to explore the Smart-Market and Oracle Pool design space. Asking and answering, and exploring interactions will be noted as they occur.

Costs:

Total Ask. ADA 981319 ($104K USD) for six months, funding six team members.

Based on a pro-rata hourly rate for the six-team members. The budget takes an FTE of USD$100K. Adjusting for experience, work, individual facilities, and short term nature of the project is used to calculate an hourly rate. The effort assigned: 30% to learning, 55% for production activities, 5% for communication, and 10% for administration overhead. Including some allowance for currency risk.

Production of five modules includes the team's learning and educational content development (USD $50K). Protocol Engineering (USD $60K). Community Engagement ($15K USD). Thirty per cent of the total budget is discounted to account for individual learning (-$20KUSD).

The budget balances the need to be fair on team commitment and be efficient in learning and delivery outcomes. Roadmap, deliverables, and KPIs are designed to allow accountability and measure progress in stages. They also have been designed to allow us to be responsive and adapt (in-terms of engagement and content) to the experience of the community.

More detailed budget break-down can be found in the attached proposal summary document.

Additional Material

Proposal Summary: https://docs.google.com/presentation/d/e/2PACX-1vQJgf57yBH8SkipwaRdjKNvUHAr9VNEaDtTr6V7THajd3YpcPhDjb2Ilrqe82J7pIEpEXxj2InEBlnR/pub?start=false&loop=false

Proposal Video: https://www.youtube.com/watch?v=klIMDN4W5sE

The Cardano Effect Presentation: https://www.youtube.com/watch?v=kXpK3os8s7M&t=1445s

References

[1] US auction theorists win Economics Prize: https://www.bbc.com/news/business-54509051

[2] Dark Country trading card game: https://darkcountry.io/

[3] CHAOSS Project Velocity: https://chaoss.community/metric-project-velocity/

[4] Community Engagement Framework: https://communityroundtable.com/best-practices/thecrs-work-out-loud-framework/

981319