To fix ideas, a prediction market is simply a way for anyone to bet on any outcome, like who will win the next presidential election, what the inflation rate will be, whether Apple should replace its CEO, or what the global temperature will be in a year. Any event is possible in a prediction market, no matter how big or how small. Prediction markets are one of the untapped opportunities of our time, with the potential to radically reshape the social landscape and use market forces to discipline decision-makers like never before.
The benefits of a prediction market are two-fold. First, the immediate benefit is that it allows markets to exist in places they traditionally have not. As the classical economist Edgeworth noted, markets allow trade, and introducing markets makes everyone better off. Today, stock markets allow investors to express their views on the value of a share of a company. Prediction markets will allow this for a much wider domain of events.
The second, longer-term benefit is that it will discipline authorities. Because people can bet one way or another with real money on the line, there will be no better truth than the market price of that event (provided enough people participate). Over time this can have effects on social, political, and corporate decision-making that will be impossible to ignore. This would be one way to hold elected officials, CEOs, and even your local HOA president accountable. The follow-on effects are profound and hard to predict exactly, typical of radical innovations.
Prediction markets have come and gone here in the US over the last decade. You may remember In Trade during the Bush-Gore election, when the probability of Bush winning against Gore was the start of every lunchtime conversation I remember from graduate school. Robin Hanson was an early advocate of prediction markets, and advised Augur, the prediction market on top of Ethereum
Prediction In Bitcoin
As the father of prediction markets, Robin Hanson influenced several early bitcoiners, including Paul Sztorc, the founder of Truthcoin. The chief problem in a decentralized prediction market is how the system knows that some event happened, and therefore, who the winners are. Computer science calls this the winner determination problem, and in a decentralized setting, it is called the oracle problem.
Sztorc proposed a clever solution to this, where individuals on the bitcoin network (“Voters”) would put their own coins at risk to verify the veracity of an event. For example, if the event is the global temperature in a year, these voters would announce the temperature, and the protocol would reward or penalize these voters based on consensus on the network. Because money is at risk, this forces these voters to report honestly. If this sounds like proof-of-stake, it essentially is an early version of it. And that’s probably why it never received broad appeal within the bitcoin community.
Nonetheless, Sztorc is now trying to build out the foundation for more innovation around bitcoin through a company he founded called Layer 2 Labs, whose chief mission is to push the adoption of BIP300, which allows for sidechains that would exist alongside the bitcoin blockchain. You can think of Lightning as the most famous example of this, but there could be others where entrepreneurs experiment with novel technologies (like a prediction market) that still settles in the world’s most scarce commodity.
Personally, I would love to see some kind of prediction market on bitcoin grow. But the truth is, I don’t see a path forward right now. Bitcoiners are right to stay laser-focused on digital sound money, to separate from most of the superfluous applications in the blockchain space. Once the altcoin community dies down, there may be more appetite for expanding around the protocol to allow for more novel applications. My bet is still on prediction markets as the single best alternative use of the blockchain, as immutable time stamping is a necessary first step in establishing a benchmark of ground truth.
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Korok Ray, PhD is an Associate Professor at the Mays Business School at Texas A&M University. He teaches The Bitcoin Protocol. He founded the Mays Innovation Research Center and the Southwest Innovation Research Lab. Subscribe to his Bitcoin newsletter PrinciplesOfBTC.substack.com
