Within the existing information system, individuals are forced to distinguish between what is true, what is an opinion, and what is misinformation. 

The lack of distinction between this data is caused in part by a misalignment of incentives. Individuals and entities are not incentivized to align their public opinion and private opinion. In this context, I define a public opinion as a thought shared openly with society, while a private opinion is what you truly believe but may choose not to share openly with society. In reality, these opinions should be the same, however there is currently a disconnect. 

It is becoming increasingly difficult to hold people accountable for their public opinion, as there is no immutable and easily accessible ledger of past opinions. There is no single source of truth. This creates challenges in verifying opinions that are eventually proven wrong and in validating one’s track record of past opinions. As a result, rather than focusing on truth, many individuals and media outlets emphasize signalling and clicks.

Prediction Markets

Alignment of public and private opinion can be improved through the utilization of prediction markets.

A prediction market is an exchange-traded market where individuals trade on information, betting on the outcome of an event. Historically, these markets have related to political betting markets, but they can go beyond this, being used to forecast any verifiable outcome.

While yes, prediction markets are a form of betting markets, economic profit is not the greatest value they create. Rather, I argue that prediction markets can use capital, both tangible (cash) and intangible (reputation), as incentives that facilitate the appropriate alignment of public and private opinion. Prediction markets discourage biased or purposely misleading predictions, as they are ultimately “punished” through a loss of cash or loss of reputation when the prediction is proven incorrect.

If a party continuously makes predictions that are based on generating attention versus informed research, their track record will be poor in comparison. This will ultimately damage creditability of future predictions, reduce this individual’s influence, and discourage attention-based predictions.

To quote Nassim Nicholas Taleb, “Don’t tell me what you think, tell me what you have in your portfolio.”

The Future of Prediction Markets 

How will the prediction markets function in the future? Let’s explore. 

Prediction Market Profile

Similar to how one has a Twitter, Facebook, or Instagram account, everyone can have a Prediction Market account. This profile would show every user’s track record of past predictions, with users free to identify through their real name or pseudonymously (see The Decentralization of Freedom). As an investor, entrepreneur, or doctor develops a reputation based on their “decisions”, individuals can build a reputation through prediction markets, ultimately introducing a new form of credentialism.

One’s track record of predictions could be broken down into categories (e.g. politics, economics, virology, weather, etc.) that would serve as the basis for one’s reputation and credibility in a specific field. The site would also be easily searchable so that one could filter by specific event, user, or accuracy of consensus (e.g. events where <1% of users predicted correctly). 

Decentralization

Existing prediction markets are predominantly centralized, meaning they are controlled by a central authority. An authority that determines who can place predictions, at what quantity, from what location, and on what event. These restrictions are not necessary. We have the opportunity to further strengthen these markets through decentralization (e.g. Polymarket), with prediction markets living on the blockchain, governed by smart contracts, and mediated by blockchain oracles.

The use of decentralization within prediction markets can facilitate many advantages over the existing system including:

Permissionless: Elimination of geographical or regulatory restrictions, allowing any individual to place a bet or create a contract (i.e. a new prediction)
No Middlemen: Users interact directly with smart contracts, eliminating third party fees and counterparty risk
Censorship-resistant: When governed by smart contracts, no user will be able to edit or delete an existing prediction, eliminating any single point of failure

By building prediction markets on the blockchain, a public, immutable database is facilitated, confirming the accuracy of past predictions by any entity or individual.

How does this differ from simply posting your opinion on Twitter?

While yes, in many instances posting on Twitter requires you to use your real name and ultimately “stake your reputation”, there is no way to confirm whether that public opinion (tweet) is aligned with your private opinion (beliefs). An individual’s public opinion may be used to generate clicks and garner attention, simply represent the other side of a controversial argument, or be virtue signalling. 

In the long run, predictions based on generating attention will yield a poor track record, ultimately reducing credibility and influence.

Combined with the immutability and accessibility of the database, prediction markets also serve as greater aggregators of information.  

Thought Experiments

The below are some thought experiments I have created for potential use cases of decentralized prediction markets.

Political Prediction Markets
Political parties are seen to hold polarizing views. In many instances, if Party A thinks X is round, Party B thinks X is square. Is this what they truly believe? Maybe. But, what if political parties had the opportunity to place predictions on the outcome of an event, with each party’s track record public and immutable? In this scenario, for a party to place a prediction, another party must take the other side of the bet for the prediction to be deemed valid. 

Consider the following example:

Question: Will YoY GDP growth rate exceed 6% in Q2FY21?
Prediction: Option 1; Yes / Option 2; No 

In this example, let’s say that Party A believes, yes, YoY GDP growth will exceed 6% in Q2FY21.

For the prediction to be deemed valid, Party B must agree to take the other side of the bet, that GDP growth will not exceed 6% in Q2FY21.

It is important to clarify that Party B’s decision is voluntary. They are not required to take the other side of the bet. In the event that Party B decides not to take the other side, the bet is deemed invalid and is not recorded on either Party’s track record, no matter the outcome. 

This ultimately maintains the integrity of the prediction markets, preventing parties from holding track records that are filled with “obvious” predictions or predictions that they themselves have created and know they will win.

Exclusive Prediction Markets 
Prediction markets where only specific individuals with technical knowledge (e.g. Medical Doctors, Engineers, Scientists) can participate. This would ultimately provide an additional filtering mechanism for decisions that benefit from technical expertise.

Consider the following question being asked in March of 2020 to a subset of virologists:

Question: Will global COVID-19 cases exceed 1,000,000 by May 1, 2020?
Prediction: Option 1; Yes / Option 2; No

The technical expertise (and thus predictions) of virologists would potentially sound the alarm on the severity of the virus earlier than otherwise. Considering that global COVID-19 cases by May 1, 2020 was in fact greater than 3,000,000, this may have proved to be a valuable experiment.

Note: The above thought experiments do not reward participants with tangible capital (money) but rather intangible capital (reputation)

Closing Thoughts

I do not suggest prediction markets be used as the sole metric of decision making. Rather, I see them as an additional filtering mechanism on top of the existing media and information system. 

Making a prediction or sharing an opinion that is ultimately proven to be wrong is not a bad thing. Being wrong should be understood as a common result of sharing ideas. Every opinion should not and will not be true, however one should be accountable for their opinion. It does not matter if what you believe is true. Rather, it matters that the opinion you share is truly what you believe. 

The value of decentralized prediction markets does not necessarily come from their prescience, but rather their ability to be aggregators of information. They confirm the accuracy of past predictions through maintaining an immutable and easily accessible database, while creating accountability and reputation among those who made such predictions. 

Matthew J. Gilmour
@mattjgilmour
Any thoughts, comments, disagreements are welcome.