Betting on the Future: How Prediction Markets Are Outpacing News and Rewriting Democracy
Introduction
With the arrival of Halloween, a season that celebrates mystery and the unknown, it’s a fitting time to dive into one of crypto’s most intriguing developments: prediction markets. Much like trying to peer into a crystal ball, prediction markets allow users to forecast outcomes—whether it's sports, world events, or even elections. These platforms have emerged as a leading use case for blockchain, offering transparent, decentralized ways for individuals to bet on the future. This year, prediction markets are taking center stage with the U.S. presidential election looming, where countless participants are staking their crypto on who will claim the Oval Office.
Main Players
Polymarket has quickly risen to become the most popular prediction market platform in the crypto space, largely driven by its coverage of high-stakes events like the U.S. presidential election. With the highest liquidity and frequent mentions across Crypto Twitter, it has emerged as a stronger indicator of election outcomes than traditional exit polls. Polymarket allows users to trade using USDC, with prices representing the market's probability of an event occurring. Although U.S. citizens are barred from trading due to regulatory issues, they can still view market data. The platform’s flexibility in allowing users to buy, sell, or place limit orders before outcomes are determined has contributed to its surge in trading volume. Polymarket is also negotiating over $50 million in funding linked to a potential token launch, which could significantly enhance its market presence. The platform has attracted nearly $1 billion in bets on the U.S. presidential election alone, solidifying its reputation as the go-to prediction market for major events and amplifying its role as a critical player in the crypto ecosystem.
Despite Polymarket's dominance, the prediction market industry is still in its early stages, and competitors are gearing up to challenge its lead. With the space now finding product-market fit, more funding is pouring in, fueling the growth of new platforms eager to capture market share. Many of these competitors are split in their go-to-market strategies, with some focusing exclusively on sports betting, while others target broader or non-sports events like politics and global affairs. Below is a table highlighting other key players in the prediction market space.
Prediction Markets: The Pros
The rise of prediction markets has brought multiple benefits, fundamentally transforming how we gather information and manage risks. One of the most notable advantages is how these markets have become a real-time source for breaking news. Unlike traditional media, where the public learns about events only after headlines are announced, prediction markets allow participants to update their bets instantly in response to unfolding developments. This provides a more accurate and dynamic reflection of the current state of events, often long before traditional news sources can report it. Additionally, prediction markets reduce the risk of censorship or bias, as participants are staking real money on their opinions, creating a financial incentive for truthful forecasting. This has made them particularly popular during events like elections, where traditional tools such as exit polls are often unreliable or manipulated to promote certain narratives. In the 2024 U.S. election, prediction markets provided a more up-to-date and reliable indicator of election outcomes than exit polls, which are frequently questioned for their accuracy.
Beyond real-time news, prediction markets offer a powerful tool for risk management and hedging. Businesses and investors can use them to protect against unpredictable events. For example, an amusement park operator could hedge against the financial impact of rainy weather by betting on weather outcomes in prediction markets, thus offsetting potential revenue losses. This creates an entirely new avenue for businesses to mitigate risks, much like how options and futures markets revolutionized risk management when they first emerged. Furthermore, prediction markets are accessible to a broad audience, not limited to sophisticated investors, giving everyday users a chance to participate in risk management and speculative forecasting.
Another benefit is their potential to tap into the "wisdom of the crowd." Since prediction markets aggregate opinions from a wide range of participants, they often produce more accurate forecasts than expert analysis or polls. This collective intelligence helps predict everything from election outcomes to corporate earnings and even major geopolitical events. This transparency and decentralization also empower individuals globally, offering a democratized platform where opinions are backed by real financial stakes, ensuring that only the most confident—and often, accurate—predictions rise to the top.
Prediction Markets: The Cons
While prediction markets offer a range of exciting opportunities, there are several notable downsides that hinder their potential. One of the primary challenges is the lack of clarity in the settlement agreements and resolution criteria. Many prediction markets, such as Polymarket and Manifold, have broad or ambiguous rules for how events are resolved, which creates uncertainty for participants. When criteria are not specific enough or self-contradictory, it discourages serious investors from putting real money on the line. For example, imagine a market predicting whether a specific law will pass by the end of the year. If the resolution criteria aren’t precise—such as defining which version of the law, amendments, or even delays in the process—the outcome can become ambiguous. This uncertainty discourages serious investors from betting large sums of money because they can't be confident their bet will be resolved correctly, even if they predict the event accurately. When criteria are too broad or poorly defined, it erodes trust, keeping informed capital from entering the space, as investors don’t want to risk losing money due to technicalities.
While prediction markets offer fascinating insights, their legality and ethical implications present significant challenges. In many places, prediction markets are considered illegal under gambling laws, limiting participation and innovation. Also, the morality of certain markets raises serious concerns. For example, there was interest in creating a market to bet on whether there would be another assassination attempt on President Trump. However, allowing such a market could incentivize an individual to carry out the act in order to profit from it, crossing an ethical line. This highlights the dangerous potential for prediction markets to encourage immoral or illegal behavior. Betting on tragic or violent events, such as war or political violence, becomes morally questionable, as it turns human suffering into an opportunity for profit. These concerns demonstrate that while prediction markets can be valuable tools, careful regulation and ethical guidelines are necessary to prevent them from being misused.
Some argue that investing in prediction markets is no more immoral than investing in the S&P 500. After all, many companies in the S&P 500, such as defense contractors, manufacture products used in warfare, which can harm human lives. Supporters of prediction markets suggest that if it's considered acceptable to profit from companies whose products are used in war, then betting on the outcomes of events, even controversial ones, should be no different. They see prediction markets as another financial tool where individuals can speculate on real-world events, similar to how investors in traditional markets speculate on companies’ success or failure.
The morality of prediction markets remains a topic of ongoing debate, and this uncertainty is one reason why they remain largely illegal in the U.S. While prediction markets offer potential benefits, such as improved forecasting and risk management, the ethical dilemmas they pose—especially when tied to sensitive outcomes—continue to shape the regulatory landscape. As a result, lawmakers are hesitant to fully legalize these markets until clearer ethical boundaries and legal frameworks are established.
The Future of Prediction Markets
The future of prediction markets looks promising, but they are likely to face regulatory hurdles as their morality and legality continue to be questioned. While prediction markets are gaining traction, particularly in political events like the U.S. presidential election, the broad uncertainty around settlement agreements and ethical concerns will need to be addressed for them to thrive. Many predict that traditional news outlets, now being outpaced by crypto-native platforms like Polymarket, will adapt by hosting their own prediction markets. This move could help them stay relevant as prediction markets become a new source for breaking news. These legacy media companies, with their established political connections and lobbyists, are also better positioned to overcome regulatory barriers that crypto-native platforms struggle with.
Another major operational hurdle for prediction markets is how bets are settled. With potentially hundreds of thousands of unique bets being placed, scaling the system to handle this complexity is critical. AI could play a major role in this area, offering unbiased and scalable solutions for resolving bets. Using AI for settlement would also allow users to create their own bets within the market, opening up a new layer of customization and deepening the reach of prediction markets.
Futarchy
Beyond transforming the way we receive news, prediction markets have the potential to change how we are governed. The concept of futarchy—where voters set goals based on values, but prediction markets determine the best policies to achieve them—could be a groundbreaking new governance model.
Futarchy, a governance model proposed by economist Robin Hanson, presents a radical reimagining of how societies can make decisions. The concept blends traditional democratic voting with the predictive power of betting markets. In futarchy, citizens would still vote on values—such as national goals like reducing unemployment, improving public health, or increasing GDP—but the path to achieving those goals would be determined by market participants through prediction markets. Instead of elected officials or experts solely deciding on policies, market speculators would bet on which policy they believe would most effectively achieve the desired outcome. The policy with the highest probability, as determined by the market, would then be implemented.
The core of futarchy lies in the idea that markets, where participants "put their money where their mouth is," are better at aggregating information than traditional institutions or even experts. Prediction markets consistently outperform opinion polls, experts, and other forecasting methods because they incentivize participants to carefully evaluate the available data. Those who are confident in their knowledge invest in policies they believe will succeed, while those with less confidence or expertise are discouraged from participating by the financial risk involved. This "wisdom of the crowd" effect ensures that the policies most likely to achieve national goals rise to the top.
In a futarchy system, voters would first choose what they value, such as reducing unemployment to a specific percentage by a certain date. Prediction markets would then be opened for policies that claim to achieve this goal, with participants betting on their outcomes. The policies favored by the market would be enacted, and their success would be evaluated based on the predefined metrics (e.g., the unemployment rate). If the policies fail to meet the goals, those who bet on their success would lose their investments, creating a strong financial incentive for only the most viable policies to be proposed and supported.
This governance model addresses several key flaws in democracy. It reduces the risk of "election cycle politics," where politicians focus on short-term gains or populist measures to win votes without delivering real results. It also helps eliminate echo chambers, as policies are selected based on data-driven predictions rather than the influence of special interests or social networks. Futarchy shifts the decision-making power to those with the most accurate knowledge of policy effectiveness, rather than those with the best political connections.
Another potential benefit of futarchy is that it increases accountability. In traditional democracies, elected representatives often fail to deliver on campaign promises and face little consequence until the next election cycle. In contrast, under futarchy, policy decisions are constantly evaluated against the goals set by voters, with the effectiveness of each policy being measured by its real-world outcomes. This could lead to more transparent and result-oriented governance.
While futarchy remains a theoretical concept, the blockchain space, especially decentralized autonomous organizations (DAOs), offers an early testing ground for this model. DAOs require decentralized, transparent governance structures, and futarchy provides a potential solution by allowing market forces to guide decision-making in a more democratic and efficient way. This experiment in decentralized governance through prediction markets could eventually extend beyond blockchain communities, influencing how governments and organizations operate in the real world.
As prediction markets continue to evolve, the integration of futarchy could transform not only how policies are made but how societies define and achieve success. By combining the collective intelligence of prediction markets with democratic values, futarchy presents a compelling vision of the future—one in which decisions are made not by politicians or experts, but by the people and markets working together to achieve common goals.
Conclusion
Prediction markets are poised for growth, but they face regulatory hurdles due to ethical concerns and legal uncertainty. As platforms like Polymarket gain traction, traditional news outlets may adopt prediction markets to stay relevant and push for legal acceptance, using their political connections to navigate regulations. AI could play a key role in resolving operational challenges, enabling scalable and unbiased bet settlements, and allowing users to create their own markets.
Beyond transforming news, prediction markets have the potential to reshape governance through models like futarchy, where markets determine the most effective policies for achieving democratically chosen goals. As they evolve, prediction markets could revolutionize how decisions are made, leveraging collective intelligence for better outcomes in both business and government.
Resources:
https://www.coingecko.com/learn/what-are-prediction-markets-crypto
https://x.com/Mikey0x_/status/1823025965598969876
https://x.com/JMannhart/status/1686376295326961664
https://x.com/shayne_coplan/status/1840033666723938669
https://x.com/atareh/status/1840848178024726626