As part of the recent controversy surrounding news coverage of cryptocurrencies, Ethereum co-founder Vitalik Buterin took exception to a report that a controversial proposal to change the platform’s code would lead to a hard fork of its blockchain, arguing it did not reflect the opinions of the full community with the greatest stake in its success.

“This is why pundits need to be replaced by prediction markets, ASAP,” Buterin said in a tweet.

But prediction markets, which allow users to essentially place bets on the future outcome of everything, including cryptocurrency prices, could do more than provide pundit-proof insights. With several emerging players already boasting multimillion-dollar market caps, prediction markets also could become a big blockchain business in their own right, and even change how it is governed.

Crowdsourcing and Coins

Prediction markets, which harness the so-called “wisdom of the crowds” to project the outcomes of future events, have existed for decades. In essence, they are marketplaces that combine crowdsourcing and gambling, creating contracts that allow people to bet on what they believe will happen. The price of the “bet,” which fluctuates in response to how participants interpret ongoing events, reflects a real-time measure of the probability of the event happening.

Prediction markets have since been used to predict everything from commodity price swings to Oscar winners.

For example, the 54-cent cost of $1 shares in a market on the politically focused PredictIt site reflected a belief by 54 percent of participants that President Trump would post between 45 and 49 tweets during the first week of May, while the pricing in a market on another site reflects 92 percent of participants betting the value of bitcoin (BTC) will not hit $30,000 in 2018.)

The speculative component, backers say, helps ensure expertise. “To have a say… you have to put your money where your mouth is,” writes economist Robin Hanson. “Those who know they are not relevant experts shut up, and those who do not know this eventually lose their money, and then shut up.”

Prediction markets first drew public attention after they were used to forecast the outcome of the U.S. presidential election in 1988. They have since been used to predict everything from commodity price swings to Oscar winners. They also have found mainstream acceptance. In 2017, PredictIt’s roughly 80,000 users made more than 300 million transactions, while some Fortune 500 companies use their own private prediction markets for insights on everything from sales forecasts to marketing campaigns. The U.S. government even considered using them to help predict terrorist attacks before the negative reaction to that idea prompted a hasty retreat.

Prediction markets have been likened to online gambling and, thus, have faced scrutiny. Early leader Intrade was shut down in 2013, and the U.S. government currently allows only sites such as PredictIt, which operate under the auspices of universities for research purposes and limit individuals’ bets, to use real cash in markets, although a recent Supreme Court ruling may ultimately change these restrictions.

The models that power prediction markets — backing up votes with something of value, contracts and crowdsourcing — are similar to the ones that drive consensus on the blockchain. Small wonder decentralized prediction markets, in which blockchain contracts allow participants, not the company operating the market, to determine the specific bets and the validity of the results, are not only allowing people to place bets on the future of bitcoin and other cryptocurrencies but are becoming burgeoning businesses in their own right.

A number of blockchain players whose business models include decentralized prediction markets include, among others, Augur, whose REP token has a market cap of just under $500 million, Gnosis (GNO), with a market cap of $115 million, and Stox (STX) at $30 million. But this may be just the beginning.

Thinking Big

Backers see the power of decentralized prediction markets on the blockchain in expansive ways. Some see the low cost of entry as an opportunity for small businesses, such as farmers in developing nations, to take advantage of the same risk-management strategies as large firms without the high overhead of traditional hedging. Others argue that AI-powered automated agents, informed by data from millions of Internet of Things-connected devices, have the potential to make the markets even more accurate.

Ultimately, the information provided by prediction markets could help bring to life new methods of governance, both within the blockchain and beyond it. Hanson’s concept of “Futarchy,” first proposed nearly two decades ago, leverages prediction market results to help organizations make decisions. He argues the solutions that rise to consensus in these markets are likely the best ones for all stakeholders.

Along with improving the operations of the decentralized autonomous organizations that coordinate collective action within the blockchain, the concept could someday extend to governance at all levels, according to Hanson: “Democracy would continue to say what we want, but betting markets would now say how to get it.”

Mark Toner
Mark Toner is a Washington, D.C., writer and editor. He has covered business, technology, media, education, and healthcare for a wide range of trade and industry publications.