We now give an example of how to buy and sell DCWi in a prediction market.
First, a trader purchases a pair of conditional bearer bonds from a bank for $1 in the year 2016. The first says “Pay to bearer $1 times DCW2016” The second says “Pay to bearer $1 times (1-DCW2016)”. Because DCW2016 is between 0 and 1, each of these pays off between 0 dollars and 1 dollar. The two of them together are guaranteed to pay off exactly $1. The bank, therefore, takes no risk in selling the pair, and simply promises to redeem them once DCW2016 is known.
Of course, DCW2016 will never be known with perfect accuracy, but as the years go by it will be known with ever greater accuracy. The bank will be happy to exchange a bond that says “Pay to bearer $1 times DCW2016” for $0.05 times ACW2016 and a bond that says “Pay to bearer $0.95 times DCW2017”.
The trader who purchased the pair of bearer bonds can now sell the one thought to be less valuable. If the trader thinks DCW2016 is actually going to be 0.72, then he will happily sell the bond that says “Pay to bearer $1 times DCW2016” for $0.83, netting him $0.83-$0.72 = $0.11. He will then sell the bond that says “Pay to bearer $1 times (1-DCW2016)” for $0.28. The trader expects to make $0.83+$0.28 = $1.11 for his $1 purchase of the two bonds from the bank.
In summary: the bank issues pairs of bonds to traders in exchange for cash. The bank takes on no risk. Traders buy and sell the bonds, establishing a market for them. Traders speculate on the value of the bonds and trade them to make (or lose) money. The market price of the bonds will fluctuate, depending on events. The bank exchanges the bonds that it has issued for newer bonds and cash, again taking on no risk.
Society benefits by getting reasonably good estimates of the DCWi.
While this is a simplified example, it conveys the concepts involved in trading in a prediction market for the collective welfare.