After pitching robin.markets to several VCs and angel investors over the past weeks I have noticed a strong trend amongst investors & builders:
prediction markets are a polarizing topic.
Some investors are very bullish and excited about prediction markets, buying in to Vitaliks Info Finance thesis (I’m in this camp).
Others are bearish prediction markets, saying prediction markets are just betting markets described using different terms.
While I don’t necessarily disagree with the statement that prediction markets are gambling/betting, I think they serve a different purpose in society which is completely overlooked by the camp simplifying the role of prediction markets. In this piece I outline three factors, both structural and societal, defining the difference between prediction markets and betting.
1. Prediction markets are free markets whereas betting markets are closed
What do I mean by this? Well it’s quite simple really, if you place a bet on True Markets, you have to find a counter-party taking the other side of the bet, meaning you can place limit orders just like when trading any financial market. On betting sites such as Stake you of course also have a counter party, the thing is, that’s always the house, meaning you have to take the price they give you if you want to participate. This is kind of like playing poker vs playing black jack, one game has a clear opportunity for having an edge, the other is designed to rinse everyone who plays. Why is that important? Because an open market is the fundamental base for markets as truth-machines. You must make room for different players with different information sets to come in and bet against each other to find a market equilibrium price. Sure you could argue that bookmakers on closed betting markets are more informed than the participants which leads to somewhat accurate odds, but why then can you find huge discrepancies across bookmakers? Because they sometimes represent different information sets or imbalances in the books.
2. Prediction markets and betting markets serve different market segments
If you look at the data behind the vast majority of betting revenue, it’s 72% men aged between 25-34 around the globe. Look at the popularisation of betting through culture like Drake being sponsored by Stake and NELK being sponsored by Prizepicks. The audiences getting lured in by these ads are not smart money, and are being lured in specifically for the purpose of getting rinsed by the sports books. In fact, since de-regulating the US betting market has grown from a measly $480 million in 2018 to $13,71 billion in 2024.
On the other hand, prediction markets attract people with an informational edge, meaning once they place their bets, prices reflect new information. Now I of course recognise that there are punters on prediction markets and smart money rinsing sports books like Haralabos Voulgaris, but I’m talking about general trends. Prediction markets also tend to take longer to settle, which leads to more “patient” capital being active whereas betting markets most often revolve around sports, providing instant dopamine kicks for the next 12 hours. This of course presents its own set of challenges, but that will be left for another article.
3. Prediction markets are part of a different societal trend than betting markets
Prediction markets are a cornerstone in the financialisation of everything, which is a larger societal trend propelled by crypto and the widening gap between the 1% and the rest. Betting markets provide entertainment value to most, edge to few and a source of cash flow to the bookmakers. Prediction markets provide entertainment to many, edge to some and information backed by financial stake to everyone. Prediction markets are essentially news with skin in the game. You can’t get that anywhere else in such a simple format. Sure, you can try to derive the implied probability of economic growth from options prices, but 99,9% of people are not capable nor interested in this.
Now, surely a financialized news protocol might emerge that removes bias and agency cost from information, but so far it’s looking like prediction markets have claimed this place in society. Just look at the US election 2024 - pollsters and news sources had it as a tight 50-50 race until the end, but prediction markets gave Trump the upper hand, which turned out to be correct.
The widening gap between the 1% and the rest presents its own issues, with Elon Musk, owner of one of the most used social media platforms, closely tied to the current US administration, the odds that X will be used as a propaganda tool of sorts are certainly higher than 50% IMO. At the same time, we are all aware of how broken the current news system is and how competing social media platforms go where the wind blows. There is a clear need for unbiased, raw information to maintain order in society and keep the public informed. Prediction markets fill this gap.
What difference does Futarchy make?
Futarchy is a governance model created by economist Robin Hanson in the early 2000s. I talked about why Futarchy is needed in crypto in my previous article, you can check it out here. Futarchy uses markets as truth machines for making organisational (or societal) decisions. As crypto-native organisations most often have a related token that represents the economic value of the network or application, Futarchy becomes very easy to implement on paper. But it’s a new behaviour, and market participants are not easy to convert to trading Futarchy. Simply put, we are bullish on prediction markets, and we believe in using markets as a collective consciousness for decision making. We’ve built an EVM-aligned decision market currently on testnet which you can try out here. Everything is getting financialised whether you want it or not, the latest proof: buy Chipotle and split up the payments.
Final thoughts
The fact that prediction markets do involve speculation, betting and gambling, does not mean they don’t serve another purpose in society vs betting platforms and sports books. In fact, for prediction markets to work they must provide a means for speculation, as two opposing parties must be able to make the case for why they are right and put money behind it. Now, I recognise that these differences between prediction markets and betting markets come with their own set of challenges for the adoption of prediction markets. Namely, attracting more liquidity to prediction markets, which will be addressed in the next article.