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My understanding is that reporters have the choice between being active or dormant. If you choose to be active, there are two costs associated with that: 1) It requires labor time and 2) If you accidentally report incorrectly, you will lose 20% of your tokens. As a result, it seems that active reporters will demand a nontrivial earnings yield (e.g. 5%/year) in exchange for being active.

Based on my understanding of the fee structure, it appears very likely that the reporter participation rate will be dangerously low from a security perspective.

For example, if annual betting volume is $1B and if the average trading time horizon is 5 days and if reporters demand a 5% earnings yield, it implies the following:

  1. Average Open Interest = $13.7m ($1B * 5 days / 365 days)

  2. Target Market Cap = $68m ($13.7m * 5)

  3. Actual Market Cap = $600m (or any number over $68m)

  4. Reporter Fee Rate = 0.01% because it keeps falling in order to make the actual market cap reach the target market cap, but because of speculation the market cap doesn't go low enough and the reporter fee bottoms out at 0.01%

  5. Reporter Revenues = $0.1m (0.01% * $1B)

  6. Reporter Participation Rate = Only 0.33% of reporters would spend the time reporting since for active reporters to earn a 5% earnings yield, most would reporters would have to become dormant until only 0.33% actually report. ($0.1m / $600m / 5% = 0.33%)

What am I missing?

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Your first paragraph is incorrect, which is what leads your otherwise correct assessment to an incorrect conclusion. There is no longer a concept of active or dormant REP. The only requirement to participate in reporting is to pay a registration fee (currently 1 REP, subject to change) sometime before the upcoming reporting window. As long as you show up and report during the window (currently 30 days, subject to change), you will get that registration fee back in full. As long as you report correctly, you will not lose any REP and if you decide not to report you will only forfeit your registration fee.

This leads to a likely scenario where people will report if they believe it is worth the labor costs to them. In your example you have $100,000 in fees being paid out to reporters. This means that in the most pathological case where only one person is reporting, that person gets $100,000 for doing it (very good money). Most likely, people will notice that and join in to get their share of that $100,000 until it is divided up so much that the new reporters wouldn't make enough to cover costs.

Of course, how big your share of the $100,000 depends on how much REP you stake during reporting, which is bounded by how much REP you control so things are a bit more nuanced than the above but the general idea remains.

Also, the security of the system is only dependent on the forking system being secure. Everything else is an optimization. The system can function fully and securely with a single reporter reporting on all events. The incentives are setup such that that person is incentivized to report accurately because that is both how the avoid losing REP and how they obtain fees (if they cheat, they'll get caught in the fork and lose REP and get no fees).

  • Note: Registration has been removed, so this answer is no longer accurate. Though, the system has replaced registration with a newer better system for ensuring participation. – Micah Zoltu Nov 26 '17 at 2:15

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