What's next for prediction markets?

It will take some time to fully process and comprehend the results of the recent presidential election.

One emerging theme is that the outcome felt different than what was portrayed in the media and the polling numbers in the run-up to voting day.

While there is nuance to the way that we understand election results, mainly because of the difference between the popular vote and the electoral college outcomes, the stories coming from news outlets before November 5 were that the race was a “tossup” or “too close to call.”

But once the votes started rolling in (or more accurately, once the breakdown of the electoral college became clear) it was obvious that there was dissonance between the pre-election polling numbers, media stories, and the actual outcome.

This isn’t the first time this has happened.

Clarifying some of the fuzziness between how major events are covered or predicted by pundits and pollsters and the on-the-ground reality is where decentralized predictions markets are starting to provide utility.

In the run-up to the Super Bowl earlier this year we took a deeper dive into prediction markets and covered how Polymarket, a new-ish platform was gaining momentum.

In the weeks leading up to voting day, election-related markets kept growing and changing on Polymarket.

Beside trying to forecast the winner of the presidential election, there were a number of different but related markets including things like the popular vote, electoral college outcome, overall outcome, down-ballet outcomes, and other, smaller election-based markets.

In some regards, there was so much attention (and money) on Polymarket’s election markets that it felt like a stress test to see how the platform would perform — and if the results were actually useful or predictive.

For people paying attention to what the media was saying and what the markets hosted on Polymarket were saying, it became clear that one side was going to be right (or "more accurate" is probably a better way to say it) and one side was going to be wrong (or "less accurate").

And, as it turned out, as the dust of the election day settled, Polymarket won.

The sudden rise in popularity and usefulness of decentralized prediction markets is triggering people.

One of the main objections is that prediction markets are a form of gambling — and so that association makes them illegitimate or somehow not the same category of tool as say a poll or survey conducted by a third party.

While decentralized prediction markets are a form of speculation: people bet on outcomes and then either make money or lose money.

What's different or interesting here is that there is a mechanism or a structure that makes decentralized prediction markets useful beyond just placing bets.

What I mean is that the public market nature of a decentralized prediction market provides utility for everybody else not participating in the market.

Interestingly, and as a quick aside, watching the election prediction markets was made even more intriguing by the fact that people living in the United States are not legally permitted to participate on Polymarket.

Although based in NYC, a 2022 decision by the Commodities Futures Trading Commission (CFTC) prohibits Polymarket in US markets because the platform is not registered as a designated contract market or swap execution facility.

Of course, there are workarounds to this ban, and based on the news this week that the FBI raided the Manhattan home of Polymarket’s founder and CEO, the government decided to racket up its investigation of exactly how many US-based people are participating. The timing of the raid, right on the heels of the election, also prompted cries that the investigation was somehow a form of political retribution.

What if, instead of gambling on outcomes, we thought of prediction markets of staking money on an idea or an opinion?

The combination of financial incentives, game theory, and cooperative market design enables a tool that is a useful way to efficiently crowd-sourced information from a large swath of sources — or agents.

SOURCE

Vitalik Buterin, the founder of Ethereum (recently profiled in the documentary Vitalik: An Ethereum Story), wrote a piece this week about the utility of platforms like Polymarket.

In that piece, he draws the conclusion that prediction markets are a stepping stone to the larger domain of info finance.

"Predicting the election is just the first app. The broader concept is that you can use finance as a way to align incentives in order to provide viewers with valuable information,” Buterin wrote. “…you can read market prices to infer a lot of knowledge about the world.”

Buterin takes a deeper dive into info finance and its potential use cases, but it felt like a lot of the concepts of info finance align with the Open Money frameworks that we talk about.

One of the biggest overlaps has to do with scale. One reason why Polymarket is thriving right now is because it is blockchain-based, which makes it easy to access (technology-wise, not so much regulation-wise), and can scale to create markets of all different sizes.

The idea about market size and info finance is maybe one of the most interesting components here.

Internet-scale markets enabled by blockchain could create new and more efficient data-gathering mechanisms about important events around the world (the US election is a great example).

But, summarizing the Buterin article here, the scope of info finance markets can also work at smaller scales — such as deploying AI agents to help with community, DAO governance, or even personal decisions.

On the face of it, decentralized prediction markets might look an awful lot like gambling, but behind the scenes, a powerful information-gathering tool is at work.

In a time of rising misinformation, disinformation, and the blurring of lines between entertainment and news gathering, maybe having a market-based solution to help ground truth important events will be valuable.