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Prediction Markets – Voting with Your Wallet

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In just 20 days, the US Presidential election will come to its conclusion, and with that, all the debate, social media frenzy, and market volatility will take a breather, too.

But who will win the 2024 election race? If prediction markets are to be believed, then-Republican candidate Donald Trump seems to have a higher chance, at above 56%, while Democrat candidate Kamala Harris’ odds of winning are slowly going down.

Do these odds have any chance of being a reality? Well, according to experts, prediction markets might offer us a better idea of what’s to happen than polls or what pundits have to say. Prediction markets, after all, allow bettors to put their money where their mouth is and not make baseless claims with no consequences.

Interestingly, national polls paint a different picture than the prediction market, with two such polls showing the Vice President just barely in the lead while a third poll shows her tied with former President Trump. Meanwhile, both Polymarket and PredictIt are showing Trump in the lead.

Prediction markets have been in existence for a long time now, but they have grown in popularity significantly in recent years as a way to predict the outcomes of policy decisions, sporting events, product sales figures, economic outcomes, and much more.

Much like gambling or financial markets, these markets deal with conditional claims on uncertain future events.

Understanding Prediction Markets: Betting on Uncertainty

Prediction markets, also known as betting markets, let users bet on the outcome of an ongoing or future event.

Much like how, in the futures market, traders bid up or down for a future contract’s price depending on their expectation of what the future price of the underlying asset will be, in prediction markets, a future event is being traded upon.

Here, users vote yes or no to future events, based on which the market determines a price representing the estimate of the probability of the event occurring. The prices indicate what the crowd thinks the probability of the event is.

Prediction markets or information markets belong to the realm of crowdsourcing, designed to aggregate information on a particular topic. This way, it extracts the belief over an unknown future outcome.

These decision markets benefit from the wisdom of crowds, and by collecting and weighing these predictions, we can have a more balanced and reliable market-wide forecast than a single expert’s opinion.

Interestingly, prediction markets aren’t anything new. In fact, the early forms of these markets were political betting.

As per Paul Rhode and Koleman Strumpf, records of election betting on Wall Street can be traced back as early as 1884, with the average betting turnover for each election estimated to be more than half of the campaign budget.

The Iowa Electronic Markets, which is operated by faculty at the University of Iowa, is one of the first modern electronic prediction markets. Then, at Project Xanadu, as per economist Robin Hanson, a professor at George Mason University, the first corporate prediction market was used.

An advocate for prediction markets, Hanson argues, “let us create betting markets on most controversial questions, and treat the current market odds as our best expert consensus,” and then reward real experts for their contributions.

What makes prediction markets particularly attractive is that they are largely efficient. And when it comes to elections, they have been shown to have lower statistical errors than polls and professional forecasters.

Beyond elections, the predictive power of these markets has been seen in industries such as pharmaceuticals and tech, where companies like Eli Lilly (LLY -1.74%), Google (GOOGL +0.3%), and Microsoft (MSFT -0.1%) have used them to forecast product outcomes. Thanks to their visionary value, many large companies use prediction markets as a prognostic tool.

Then, in the summer of 2018, the first decentralized prediction market, Augur, was launched on the Ethereum blockchain. Since then, the prediction market in crypto has exploded, with Polymarket leading this race.

Click here to learn all about buying Augur (REP).

Explosive Growth in Prediction Markets as Elections Near

As the race to the White House enters its critical final stretch, the prediction markets are also picking up steam. In Q3 of 2024, prediction markets grew a whopping 565.4%, according to the latest report from crypto data provider CoinGecko.

This massive growth had the volume on the top three prediction markets reaching $3.1 billion in Q3, from less than half a billion dollars ($466.3 mln) recorded in Q2.

Almost all of this volume, however, belongs to Polymarket, accounting for 99% of the market share in September. Polymarket is an unregulated crypto-based prediction market that covers all kinds of topics, ranging from sports, politics, and crypto to business, science, and pop culture.

During the same period, the betting volume on the platform increased by 713.2%, while transactions grew by 848.5%.

About $1.7 billion of bets, which accounts for 46% of its total volume, meanwhile have been placed on the “US Presidential Election Winner” since the beginning of 2024. This volume has since risen past $1.89 billion on Polymarket.

Just this week, the dYdX Foundation introduced a new derivatives product called Trump Prediction Market Perpetuals, which is pegged to the outcome of the 2024 US presidential election. Using this product, traders can apply advanced trading strategies in order to predict how Donald Trump will perform come Nov. 5.

Traders can take long or short positions on Trump’s election prospects. Then, depending on how election trends change, they can increase or decrease their stakes.

The product comes with features like perpetual leverage, advanced risk management via stop-loss and take-profit orders, and real-time settlement, for which it operates in conjunction with Polymarket’s TRUMPWINYES market.

With US elections around the corner, Polymarket is clearly enjoying a lot of traction and has already raised $70 million in venture funding. Here, traders buy shares depending on which outcome they think is more likely to happen, with share prices rising and falling based on demand. Bettors stake USDC on an event’s outcome while the platform settles and pays out wagers using Ethereum-based smart contracts.

Tech billionaire Elon Musk also sparked a wave of interest in Polymarket after he came in support of prediction markets recently. In his comments posted on X (previously Twitter), Musk said that the decentralized predictions market can predict the 2024 US presidential election results more accurately. Musk wrote:

“Trump now leading Kamala by 3% in betting markets. More accurate than polls, as actual money is on the line.”

Data from DefiLlama shows that Polymarket currently has $177.55 million in total value locked (TVL), up from $9.65 million at the start of this year. This TVL represents the total quantity of USDC held in the conditional tokens contract and the collateral submitted to every market ever opened on the platform.

In comparison, its biggest competitor, Azuro, has a mere $8.49 million in TVL, followed by Predict Fun at $7.87mln, Gnosis Protocol’s $5.39mln, Lumi Finance’s $5.08mln, Augur’s $2.08mln, and EtherFlip’s $1.97mln. Others like Thales. ZKasino, MegaMoon, and PRDT have their TVL between $170k to $300k.

The Legality and Ethics of Betting on Elections

While the crypto sector is betting on US elections on Polymarket, the platform does not operate in the US. It actually stopped operating in the US market after reaching a $1.2 million settlement with the Commodity Futures Trading Commission (CFTC) in 2022 for allegedly offering unregistered options contracts and failing to register with the agency.

This is because prediction markets for US elections face significant legal restrictions due to the country’s gambling laws, particularly under the CFTC regulations. The agency has actually blocked attempts to create legal prediction markets in the US involving election outcomes.

So, betting on US election outcomes, in general, is prohibited. But recently, a big change came when, earlier this month, a federal appeals court in Washington, DC, allowed the prediction market Kalshi to offer election betting.

With this, the court ruled that the CFTC has failed to demonstrate just how the online betting platform could harm the elections’ integrity.

“The concerns voiced by the Commission are understandable given the uncertain effects that Congressional Control Contracts will have on our elections, which are the very linchpin of our democracy.”

– Judge Patricia Millett

Judge Patricia added:

“But whether the statutory text allows the Commission to bar such event contracts is debatable, and the Commission has not substantiated that risks to election integrity are likely to materialize if Kalshi is allowed to operate its exchange during the pendency of this appeal.”

Betting on election results is not the extent of CFTC’s clampdown; earlier this year, the agency proposed a rule to explicitly ban events-based betting, covering sports, awards shows, and other things.

Following the ruling, Kalshi relaunched its congressional control contracts, and now Americans can bet on which party will be in control for the next four years.

Stephen Hall, legal director and securities specialist at non-profit Better Markets advocating for financial reform countered the decision by saying that with AI, social media, and deep fakes already influencing election outcomes, “ready access to an election gambling contract such as Kalshi’s will intensify that danger with the promise of quick profits.”

However, Kashi argues that these contracts are in the public interest by providing accurate data for election forecasting.

Thomas Miller, a data scientist at Northwestern University, is of the same view. He’s actually known for his accurate predictions during the last elections, for which he relied on prediction markets’ examination. He told Fortune:

“Political betting sites are the best at predicting the wisdom of the crowd.”

According to him, unlike polls, which tell how people responded in the recent past, the odds on prediction markets show real-time sentiment and, as such, are better for mapping the future.

How Betting Markets Offer a More Accurate Election Forecast

A great advantage of prediction markets is that they have a large group of investors who not only stay in the markets till the last day but even become larger as Election Day approaches.

Compared to the tens of thousands of investors that prediction markets have, opinion polls involve about one and two thousand respondents. According to Miller:

“Prediction markets are more reliable than pollsters and pundits. A betting market isn’t asking people to give an opinion or preference but to put their money down. When you put your money down, you believe what you are betting on. You might not like the outcome, but you believe it will happen.”

During the 2020 presidential elections, Miller’s model was so accurate that it only predicted one state (Georgia) incorrectly, for which he blames not accounting for the Republican bias, which he is now using this time to gauge the degree of bias in prediction markets.

Miller’s forecasting platform follows the money and uses pricing data from PredictIt, which is then used as input to forecast how the Electoral College will vote.

Another advantage of prediction markets is that they are quick to respond to new information and make an attempt to predict what will happen in the future. Meanwhile, polls tell us how voters feel and take time to update.

“If you wanted a single best predictor, one source of information to know what’s going on in the elections, it’s the prediction market.”

– Harry Crane, a statistics professor at Rutgers University, told CNN

Every piece of information from the news, aggregator, and expert opinion to poll all of it is combined in the prediction markets, where the participant has a financial incentive to get it right, he added.

This is not to say that prediction markets are infallible. Not only are the markets inaccessible to everyone, but they can also be manipulated by someone with a lot of money. However, polls have their own issues in terms of sampling bias, leading questioning, and nonresponses that produce inaccuracies.

As such, for now, both polls and prediction markets have their role in helping us understand future political events.

“While prediction markets are gaining traction, they’re not going to replace traditional polling anytime soon.”

– Ryan Waite of Think Big told Fortune

According to him, together, they both give us a fuller picture by complementing each other. While polls help us understand how different voter segments feel about issues or candidates, prediction markets provide us insight into how the broader public thinks things will play out.

Then there’s the matter of insider trading. There are concerns that the explosion of Polymarket’s popularity may be leading to this issue. But revolutionizing who has access to information, according to Hanson, is how it should be because accuracy is the primary objective and fairness.

“If the point of (prediction) markets is to get accurate information on the prices, then you definitely want to allow insiders to trade, even if that discourages other people from betting because that makes the prices more accurate.”

– Hanton told Decrypt

He further explained that while Wall Street operates on the premise of fairness—since only then would investors buy stocks—prediction markets don’t follow the same principle; they exist solely to accurately predict future outcomes.

But there’s reputational damage to consider, as discouraged bettors can negatively affect price accuracy. It’s all a balancing act for platforms like Polymarket, as high-information traders need liquidity, which comes from low-information traders, who need to trust the platform in order to use it.

As Balaji Srinivasan, former CTO of Coinbase, noted previously, blockchain-based prediction markets are strong enough to counterbalance the spread of incorrect information. He added:

“They give people a financial incentive to seek the truth and then protect them with the twin shields of pseudonymity and decentralization.”

Final Thoughts

With all eyes on the upcoming elections, the markets are currently rejoicing, with the S&P 500 hitting fresh highs, up 21% so far this year, and Bitcoin back above $66,000. And Prediction markets, here, offer a unique perspective on how elections will materialize and how future events might unfold.

Powered by the wisdom of the crowd and driven by financial incentives, these markets are gaining substantial attention and are showing no signs of dying down. As technology and regulation evolve, prediction markets should be expected to grow, shaping how we forecast not just elections but all major societal outcomes.

For instance, on Polymarket, currently, people are betting on topics like the Champions League Winner and whether Israel’s military will respond against Iran by Friday. Will Bitcoin hit a new all-time high in 2024? What is the number of rate cuts by the Fed this year? Or Who will be the next James Bond actor?

So, prediction markets have the potential to act as a powerful tool to understand shifting sentiments and how the future might unfold. As these markets become bigger, blockchain technology and crypto can play a big role here.

While prediction markets’ ability to harness the wisdom of crowds and quickly respond to new information gives them a significant edge in forecasting outcomes, they have limitations, which present hurdles as they grow in popularity. Nevertheless, their utility in gauging public sentiment across various fields suggests that these markets are here to stay, providing a valuable glimpse into the future.



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