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Predicting The Future With Crypto

Robin Hanson makes a persuasive case that seemingly every big decision should be made with prediction markets.

His introduction to the subject often starts with the example use case of a board deciding whether or not to fire a CEO. 

Rather than base their decision on unfalsifiable arguments, a board could offer two prediction markets: one for what the company’s stock would be worth if the CEO is fired, and one for what it would be worth if they are not fired.

The board could then implement whichever decision predicted a higher price.

In other words, instead of making a subjective judgment call on which argument, for or against, is right, prediction markets allow you to test which argument is right.

Prediction markets provide decision makers the real probabilities implied in the decisions they’re making. 

This could have applications far beyond boardrooms.

Imagine, for example, you’ve found your dream marriage partner, but that partner requires some convincing.

You could attempt to woo them with some mix of charm and logic but 1) it might not work and 2) if it does, it won’t be for the right reasons (your charm and logic has no informational value as to what it’s like being married to you). 

More productively, you could instead start a prediction market stating, “If X and Y marry, will the marriage last for at least 50 years?” and then ask all of your mutual friends and each of your families to place their bets.

Results in hand, you’d only have to present them to your partner — who could argue with a 90% chance of staying married for 50 years? 

What it lacks in romance, it makes up for in utility.

There are challenges, of course — one obvious one being that no one wants to wait decades to get paid out on a bet.

Another obvious one is that the most common prediction markets are simply not allowed in the US.

But Hanson thinks these and other challenges can be overcome, in large part by creating “a new kind of stock market for investors.”

If so, it’s a market that’s likely to be denominated in crypto.

Crypto ❤️ negative-sum games

The made-for-each-other combination of crypto and prediction markets had a turn in the spotlight yesterday when the Polymarket odds of an ether ETF being approved shot from 10% to 70%.

This was an ideal scenario for a prediction market because the relevant news was highly technical (exchanges being asked to update 19b-4 filings), the bet will soon be resolved (Thursday) and a good amount of money had been wagered ($675,000). 

The outcome was useful information for anyone interested in the much bigger market of ETH: Instead of scrambling to learn what a 19b-4 filings is or relying on a single source of truth on the matter (the Bloomberg guys), you could instantly tap the wisdom of the crowd by looking at Polymarket.

The immediate availability of that information may partly be why ETH’s initial 10% move higher so easily extended to 20% — everyone knew exactly what the news meant.

Wouldn’t it be great to have that kind of informational certainty in, well, everything?

It seems so obviously useful that it makes you wonder why prediction markets have yet to catch on in a meaningful way. 

There are reasons.

The main one is often thought to be regulatory: The CFTC will not allow prediction markets in sports, elections and, weirdly, the Oscars.

The CFTC says this is because these markets “fail to serve an economic purpose.” 

(Note: If you’re waiting on the CFTC to allow DOGE futures, you may want to reconsider).

But permissionless crypto fixes this, as Hanson has noted: "On the blockchain you may not need permission from any government."

Crypto could also enable small betting sizes, incentivize market making, trustlessly hold collateral, offer fully transparent trading and remove the opportunity cost of waiting for a bet to resolve (by earning yield on-chain).

Unfortunately, prediction markets have one big problem that crypto probably cannot solve: There’s not much demand for them.

There appear to be several reasons for that, as detailed here, but the main one is that prediction markets are a negative-sum game.

That limits its target audience to traders and gamblers (eliminating the much bigger pool of investors) and puts prediction markets in competition with the other big negative-sum games: sports betting, casinos and memecoin trading.

Prediction markets would serve a much greater purpose than any of its competition, (“socially valuable information”) but the competition is more fun.

Waiting weeks or years for a bet to resolve itself is just not very entertaining, and you can’t expect anyone to play a negative-sum game if it’s not fun.

As such, yesterday’s successful demonstration of crypto-based prediction markets is probably not the start of market-based decision-making for everything.

But if betting-based marriage proposals ever catch on (outside of Vegas), the bets will almost certainly be made with crypto.

― Byron Gilliam

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Consumer Crypto's Frictionless Speculation

In this episode, the research crew dives into the recent launch of VanEck's meme coin index, the state of consumer crypto adoption, and the controversy surrounding key opinion leader (KOL) investment rounds. The conversation also touches on the challenges faced by AMMs in the form of loss versus rebalancing (LVR), and how this issue compares to impermanent loss.

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