If you talk to a prediction market enjoyer they'll explain that their benefits fall into two categories:
- Prediction markets offer a way for insiders can get paid to reveal information
- Prediction markets make it expensive to lie about beliefs
Unfortunately, the current crop of prediction markets is focused more on extracting money from gambling addicts than on either of these two benefits. In this nanoessay, I will explore each of these potential benefits and how a prediction market could realize them.
Revelation of Insider InformationRevelation of Insider Information
Knowledge is power. Insiders, by definition, have more knowledge than the general public and, as a result, have more power. This creates an incentive to further restrict information flow. In other words, the nature of knowledge, that it grants whoever posses it an advantage over those who don't, creates an incentive to gatekeep, to obscure, to lead astray and suppress.
Insiders can make money betting on prediction markets but to make the bet, an insider must reveal their insider knowledge. This is similar to the incentive judo that Bitcoin offers to central bankers: print fiat money to buy truly scarce money but, in doing so, you must further diminish the value of your fiat.
A prediction market that wanted to realize this public good would need to be private. The insiders are in a prisoner's dilemma where any one of them can reveal the information they have but only one can benefit. The desire to maintain their power, creates an incentive to punish their fellow insiders who might participate in prediction markets and to outlaw "insider trading". This means that insiders are more likely to defect if their defection is private.
Making Lying More ExpensiveMaking Lying More Expensive
Control the frame, control the world. The self-fulfilling prophecy, the Overton window, the infowar; all concepts that boil down to the simple fact that reality is shaped by our beliefs. From this fundamental fact about the nature of belief, it follows that we all have an incentive to shape public belief in such a way as to benefit ourselves. Whether it's the nytimes "forecasting" a 99% probability of Hillary Clinton winning the 2016 election, or the more mundane "diamonds are forever"-type sloganeering public belief is constantly being influenced by lies designed to create a reality that benefits some interest at the expense of truth.
An honest pollster does not need to worry about the interests of the times' owners any longer, he can simply apply his statistical intelligence to make large bets on a prediction market. The family that owns the nytimes, on the other hand, can no longer lie to you for free. To influence the market probability towards their narrative, would have to put some money on the table (money that would end up being paid out to the honest pollster).
A prediction market that wanted to realize this public good would need to be uncensorable. The reason that narrative control was still possible in 2016 was that the dominant interpretation of federal law at that time was that prediction markets were illegal. We can be sure that powerful interests are already working on returning us to this status quo.
Por que no los dos? the extraction of sucker money is sooort of HOW markets improve things
An enlightened point. You're right, the gambling addicts add liquidity for intelligent traders, but it's only a public good (good for us non traders) if the intelligent traders can bet privately on important questions.
@Team_Predyx @mega_dreamer
The thin market problem is the thing that killed every prediction market before Polymarket, and nobody talks about why Polymarket actually solved it.
Robin Hanson's original futarchy proposal (2000) required subsidized market makers -- automated systems that would deliberately lose money to bootstrap liquidity. The idea was that the information value of accurate predictions justified the subsidy. Every academic experiment from the Iowa Electronic Markets onward ran into the same wall: without enough traders, the prices aren't informative, and without informative prices, you can't attract traders.
What Polymarket did differently wasn't the prediction market part. It was using CLOB (central limit order books) on Polygon instead of AMMs. That matters because AMMs have a built-in adverse selection problem -- informed traders extract value from liquidity providers, which means LPs leave, which means liquidity dries up, which means prices get less accurate. Order books let market makers set their own spreads and manage inventory, so they stick around.
The irony is that the "insider trading" benefit you describe actually works against market accuracy in thin markets. If there's only $50k of liquidity on a question, one insider with $10k can move the price 20% -- which is informative -- but it also means every other participant just lost money to someone with better information, so they leave. You need markets thick enough that no single trader dominates. Polymarket gets there on presidential elections. On most other questions, it's still basically a poll with extra steps.
The real test for your "private + uncensorable" criteria is whether someone builds this on Lightning. Slashtags-style identity with payment channels as the settlement layer. No KYC, no custody, instant settlement. That's where the actual insider information revelation happens -- when the Chinese factory manager can bet on supply chain disruptions without Polymarket's compliance team flagging the account.