I know that you’re all probably sick of hearing about the election as it dominated headlines yesterday but I wanted to talk about how prediction markets played a unique role in this years presidential election.
It seems that prediction markets finally found their stride because there was a market for people to bet on that they actually cared about – the result of a major election. There are 3 major decentralized platforms that are built on Ethereum that saw a nice jump in trading volume and open interest – Polymarket (built on Matic Network), Augur and Omen. There is also a popular centralized market on the crypto exchange FTX.
The beauty of a prediction market is that the predictions can change in real time as new data comes to light. You can see from the chart above that this election has been anything but certain – there have been upset wins in certain states across the board for both candidates and the markets have reacted accordingly. At time of writing, the prediction markets are giving Biden a healthy chance to win due to ongoing vote counting in key battleground states (but these states can still swing either way). Once just one of these states are called for a candidate, it is expected that the prediction markets would swing wildly depending on the outcome.
Another key point here is that before the vote counting started, prediction markets had Biden at a 60% chance to win with Trump at 40%. Meanwhile, many traditional polls had Biden (the democrat) at an 80%-90% chance to win which, just like 2016, turned out to be completely wrong. As Vitalik notes, this is a pretty cool validation of the prediction market model. He also had some thoughts around statistical models vs prediction markets here.
I’ve long thought that one of the major reasons prediction markets hadn’t taken off yet was due to little to no interesting markets being available to bet on. No one really cares to bet on markets like “will ETH trade at over $1,000 on [insert date here]” because if you believe it will then you can either just buy ETH or you can trade options or futures markets. Though, markets like “who will win the presidential election” or “who will win the Superbowl” are much more interesting and have a potential mass appeal.
In saying all of this, I think the term “prediction market” may be a misnomer here – they’re just markets where people are betting on outcomes. Just like people will buy ETH at a certain price betting on it going up, so too will they buy an outcome on a “prediction market” to bet on it going higher. I look forward to the future where we have many different high-volume markets across the various decentralized prediction market platforms on Ethereum.
Have a great day everyone,
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All information presented above is for educational purposes only and should not be taken as investment advice.