Hello, how are we doing? All good?

All right.

Well, hi everyone. Thanks for joining our talk today. We'll be discussing the incentives and illusions in prediction markets.

Now, I'm very lucky to be joined by two of the leading experts in the space.

To my right is Micah of the University of Oregon and Paul from LayerTwo Labs.

Unfortunately, Derek can't be with us today, but I'm sure he's with us in spirit.

So, first and foremost, Paul, can you give us a little bit of an introduction for those that may not be aware of what is a prediction market?

Yeah. My name is Paul Sztorc, and I've been an advocate for prediction markets on BTC since the year 2013 or something.

And the prediction market is an incredibly important technology that not a lot of people have realised how important it is.

It's really like a new form of media, if you really think about it.

And it's sort of like you would be in the same category as radio, the printing press, smoke signals or something.

And a prediction market is special because it lets a large number of people disagree, and it produces one outcome without favouring any person arbitrarily.

So, we have this slide here. I don't know if people can see it.

They can see it either side.

And so, yeah, a prediction market is, to keep it short, it's basically a contract on an event.

And you have these events like, will the Republican Party win the next election?

You pay out a dollar. If that happens, it will pay nothing.

If it doesn't happen, that contract would trade on the market, and it would have a varying price,

and that price would vary with the likelihood of the event actually happening.

So, Micah, why do we need prediction markets as opposed to just doing opinion polls or forecasts or that type of thing?

How do these differ from what we traditionally had previously?

Well, with polls, you kind of have to get a phone call from someone who asks you a question, and you might not be the expert.

Prediction markets are great because they're going to incentivise people who at least believe they know something about the topic to go engage.

And add to the, I guess, market, add to the diversity of the bets that are being placed.

You know, polls are just a data point.

They don't give you a probability of the event, and you have to kind of handicap those.

You know, there's some ways you might want to handicap prediction markets,

but I think you're going to get better, kind of better in general, information that's kind of actionable.

Like, you're going to get a number, which is a probability.

Is that because there's this monetary incentive, there's this skin in the game, whereas with polls and stuff,

you know, you can say what maybe you think you want the answer to be,

but because you don't have that kind of fiscal involvement, they're maybe not as accurate as prediction markets.

Yeah, that's exactly right.

The prediction market treats error especially.

It says this is the current price, and it says anyone who disagrees, you can make money,

you can buy the cheaper leg of the event if you think something is selling for $0.70.

You know, there's a joke on some of the prediction market sites where they say something like,

they're selling dollars for $0.70, where they think this is certain to happen.

They had one about, like, will Jesus Christ return?

There was a colorful example on PolyMarket.

It was like, will Jesus Christ return?

And that was trading at $0.05, but if you flip it and you bet on no, then that's $0.95 on no,

so they're selling dollars for $0.95, and you can make money by correcting the price towards zero,

which seems a little more likely to me.

So I think the first thing everyone thinks when they think prediction market is, is this just the new gambling?

Like, what really differentiates prediction markets to gambling, Paul?

Well, gambling, I think with gambling, there's no, like, the prices are fixed,

and in the prediction market, the prices vary, and they produce socially useful information.

So it's very useful for us to know, for example, like, how likely a certain thing is to happen.

And, in fact, prediction markets have other features that have yet to be explored where you can bet on, like,

if we did this, would that happen?

So the prediction market will let us know what's likely to happen and what's likely to happen if something else happens.

All that's useful if you go to, like, a roulette wheel, or if you, you know, like, the odds,

it's just going to pay 35 to 1, and your odds are just whatever it is.

It depends on how many green squares, but it'll be, like, 38 to 1 on hitting the number,

and so it doesn't actually produce anything useful.

I think there's another key part of gambling in particular, which is that gambling is always negative expected value,

which is how the casino makes their money, whereas in theory, the prediction market should be something like,

if you just, if a completely uninformed person just threw a dart, it should be something like zero expected value.

And if someone had extra information, that should be more value.

They should always be able to make money by putting their information into the market

and changing the price and thus informing the rest of us.

So those are some differences.

So, Mike, would you agree that it's a little bit more than gambling, or at the minute, is that kind of where the market is?

Well, yeah, unfortunately, I think that's the most salient thing going on right now

because everybody's betting on sports and elections, and, yeah, and there's a lot of, I mean,

I think people that have looked at these for a while know that there's a lot of good use cases for these

where you can just kind of add, like, to the epistemic environment,

just let people try to think about things and understand them.

When you bet money on an outcome, it doesn't mean you're going to think correctly.

I don't think skin in the game fixes everything.

It means you're going to think about it, and you're not going to make the really stupid mistakes.

And hopefully, you'll have people saying less stupid things.

It's the kind of thing I wish, like, we had these in COVID.

You know, we had people out there saying that COVID was going to be over in April 2020.

I wish that person would have bet out their wealth on that, and we could have collected the Denny and Kruger tax.

I mean, there's a number of, like, things like this where, you know,

issues where people don't really think about something until you put a little money on it,

and then you have to kind of, like, ask yourself, oh, you know,

the experts were actually kind of probably right, but here's where they might be a little bit wrong.

And I think that's useful.

I think it's going to fix, well, it won't fix all the epistemic issues, but it could maybe work in that direction.

Yeah, and Paul, if it's not gambling, then if we're, I mean, we're a Bitcoin conference,

would there be any reason to trade prediction markets on what the Bitcoin price may be?

And how can that be different to, say, buying an options contract or just spot Bitcoin?

I think that actually, yeah, this is correct, that unfortunately,

most of the actual use, the application of prediction markets in practice today

is gambling on sports and things like that, which I think is a mistake.

It's sort of misleading in the way that, like, when the printing press was invented,

it was just used to copy the Bible over and over again.

So that was, of course, that was a big breakthrough for technology.

But that wasn't, if you just described the printing press as like a religious technology

or like something, a way to make more Bibles, that would be like kind of missing the bigger picture.

And similarly, with respect to having a prediction market on the spot price of Bitcoin,

we kind of already have a market for the spot price of Bitcoin.

And that's the spot price today.

That kind of is a prediction of what the future price will be.

So I think that, again, this is like, these are like unfortunate things that people like trying.

They're kind of taking a stab at how to use this.

But this is like a Gutenberg Bible kind of situation where they're fitting it into the old model

and they're not doing the really cool new stuff, in particular,

what Robin Hanson, Professor Robin Hanson, called the decision markets

or what I call the multidimensional markets.

We have like if this, then that.

And you can do that an unlimited number of times.

You could say like, if we nominated this candidate to run, would they win?

Or one thing we could do would be like, if we activated this soft fork in Bitcoin,

would the price go up?

Or if we didn't, or if we rejected it, would the price go up?

Something like that.

So those would be much more interesting applications.

Okay.

And I know for myself and probably a lot of people,

the first kind of exposure to prediction markets were when they blew up in popularity

in the 2024 presidential election.

Pauli Markit came out and said they were unbelievably accurate, far beating the polls.

And Mike, I know you have a little bit of pushback on this.

Maybe they're not quite as accurate, the social consensus, as maybe many are led to believe.

Yeah.

They actually did pretty poorly.

I mean, they gave Donald Trump a 27% chance of winning the popular vote.

And he won the popular vote.

And giving him a 27% chance, that's not like evidence that you know something that we don't all know.

I think a lot of people kind of got one shot when they were watching it at the end of the day.

And you see the New York Times needle, which is kind of going like this.

But this is after all the results are coming in.

And the people that are, you know, they have their models and they're plugging them in.

And they're driving the markets like really quickly towards, you know, 98%.

Well, the New York Times was still kind of like, you know, slow.

But there was only this very small window of time where I guess the New York Times knew less than the markets.

The markets gave Trump a 57% chance of winning.

I mean, Pauli Markit, for example, the day of the election.

Like Nate Silver called it basically a tata.

So this is really almost indistinguishable in statistical terms.

You'd have to do like, you know, many, many trials to actually determine if this is like a really significant edge that the markets have.

So, Paul, a lot of people look to prediction markets and say it's basically just a way for insider trading to be facilitated.

That's the only real edge is that people have knowledge that isn't yet publicly available.

And they're just exploiting that kind of time gap.

Is that the case?

And if so, is that a bug or a feature?

Yeah, I agree that this topic has dominated the conversation about prediction markets over the last two months.

I think really it's bizarre.

It's an interesting situation because what the prediction market really what I was saying before is what it does is it says if you disagree with the price.

And you think that you have better information than what the market is reflecting, you can then trade and make money.

So, again, that's like if you knew Jesus wasn't coming back and you could buy the know for $0.95 and it would pay off a dollar.

So, in a way, people kind of want to have it both ways.

You know what I mean?

I prefer to have it the way where the prediction market is eating all the information of the world, gobbles up all the information of the world, including all the insider information.

And in so doing, it gives that information to the rest of us.

So I think it's actually good that it has the ability to absorb information from everyone, including the insiders.

And I think this is a feature.

And there's a criticism of this that says basically that why would anyone trade if they're all insiders in there?

But there are ways around that criticism by, like, for example, subsidizing the market and stuff like that.

So I think that we want the world where the market is getting the right answer as quickly as possible.

And we don't really – yeah, like the casino world, it's very fair.

Everyone gets the same – when you sit at the roulette wheel, everyone gets the same odds and everyone has the same information because it's not really about anything.

But with this, it's actually about things.

And I think that's – so that's the whole – kind of the whole point.

The original prediction market website was called Intrade.

I think – I don't know, but I think that that was kind of a little bit of a joke, like to say Intrade, like insider trading or something.

But, yeah, I think the information – the fact that the markets absorb information is the key point.

And this insider trading word is like a very scary word that people are like, oh, that means bad.

And so I understand why it hits people emotionally.

But it's actually not the right way, I think, to think about what's happening.

Yeah, I mean, insider trading, I think early days when they were talking about it was sort of the point.

There's a lot of use cases like predicting what CEO is going to go down for embezzlement or sexual harassment or things like that, which might be hard to do if you just went to HR.

You could start a prediction market.

There's a lot of whistleblowing, those kind of things where you can just kind of get information into the public.

And it's a new channel for that that you might not have if you just have that information.

The – I think people are going to bet.

I don't think you need to subsidize the market because people –

Some don't, which is great.

That's very convenient for people who like prediction markets.

Then you have all these people giving – adding liquidity and giving money, essentially subsidizing the informed trader.

So it's very convenient, yeah.

Yeah, there was a paper I saw like a couple weeks ago that said like 3% of the traders basically make all the money, which –

I didn't quite understand fully the methodology of like how they describe these people as accurate because it's kind of like saying the team with the most points at the end of the game has a pretty good chance of winning.

Because these traders, what happens is these 3% of traders, which they move quicker and they move the market towards the resolution and they make the most money.

And so what it sounds like what happens is everybody makes their bets and you get this kind of general idea, which is actually pretty good.

People on average are really good at predicting things.

Like we have this wisdom of the crowds.

It's like Galton's ox phenomenon where Francis Galton asked a whole bunch of people to guess the weight of an ox.

And he took the average and they basically nailed it.

And so this is getting people kind of activated.

He made people pay – I think it was like six pennies or something to discourage joke answers, which I think is – there's a tiny little bit of a prediction market.

It wasn't quite the same, but it was like he did have to – he made people pay actual money to submit and he gave them a prize to whoever was closest.

So there was a tiny prediction market dimension to that, even though that's often – well, yeah, sorry if we're drunk.

Right, but there was no actually like invisible hand sort of like guiding the market to the truth.

It was just like people are pretty good at guessing.

And then it seems like what's happening is once the actual answer comes into focus, you have these traders which can kind of move in and then get that little bit of alpha.

Sometimes it's just – I mean, like this is what happened in the election night is people really had the good models and they knew how to take the results that were coming out of all the precincts and plug them into their models.

They got to 98 percent before everyone else did.

I would like to add one thing about the insider trading phrase as being like a negative emotional phrase, which is like which two people in the world have ever had exactly the same information, which is like that's never happened.

But again, in other contexts, such as like the roulette wheel or whatever, it's kind of like you do it.

Everyone has the information because there is no information or if you bet on flipping a coin.

So I just want to throw that out there.

Like in the real world, if you're actually betting on like who's going to win the election, well, it's like I don't know if you could even find two people who have exactly the same information and then which one of them is an insider and which one is an outsider.

How do you know before the fact which it is?

I guess the next point from there would be it kind of brings some game theory into things, because now that is a financial incentive to potentially change public opinion.

Maybe you could just try and play a deception card to try and make the masses think one thing so you can profit off another.

I'm sure people have heard stories of kind of rigging how the results are verified by changing the weather markets, by holding a hair dryer next to the sensors.

Is this just incentivising more deception rather than trying to actually gain more accuracy in finding the truth?

Well, I mean, there's always like Goodhart's Law and Campbell's Law, which if you use any...

This is why I don't think futarchy or decision markets are a great idea, because if you use anything as actionable, that number is going to have value and it's going to have value to move it.

So people can put more money on an outcome if that's going to pay off for them, especially if it's a conditional thing.

If this happens, then this happens. If you can kind of bluff, you can say that's never going to happen.

And then maybe the outcome won't happen by the fact that you've bet against it.

Well, my view is actually the decision markets are much, much harder to bluff.

So if you only had something that was like, will Hillary Clinton win the next election or something, she could put a lot of money on yes, make it look like a foregone conclusion, make it look like she should win the nomination,

and then make it maybe look like she should win the election, maybe get the people who would vote against her demoralised and maybe stay home.

But the decision markets, once you do that, it gets much harder because it says something like, if we nominated Hillary Clinton, would we go on to win?

Or a different way would be if the Democratic Party or the Blue Party won the election, what would happen to GDP?

Now you have to bet on two things at once. You only get paid if both of them happen, and they end up with a situation where maybe you can make it look like the person should be elected,

but then when they ultimately fail to hit the GDP target, you lose all of your money, and you're losing an exponentially large amount of money at this.

I actually think it becomes more difficult, but it's very hard to explain without slides and a big grid of numbers and charts and stuff, which we don't have here right now.

I was just quickly going to say, just to tie this back into Bitcoin, the example we've got here is looking at the quantum threat potentially to Bitcoin,

because if we see Satoshi's coins move, then maybe we can assume that someone has finally cracked a sufficiently powerful enough quantum computer to start breaking Bitcoin's cryptography.

So could prediction markets also be a way to hedge your bets? Maybe you hold spot Bitcoin, but just in case, you maybe bet yes on Satoshi's Bitcoin to move,

so if the outcome happens, you can mitigate your losses to some extent.

Yeah, this is a lot of areas for cloak and dagger stuff.

I mean, if maybe today China has started mining his Bitcoins, maybe they're not going to tell anybody.

They're going to mine as many as they can, and maybe if they think it's leaking, they could wait until 2027.

I mean, January 1st, 2027 or whatever.

There's lots of things you can do.

If I suspected that somebody else was mining Satoshi's coins in secret, I could go put a large bet on that,

and then kind of try to scare them into, I don't know, firing one of their employees, figure out who's leaking information.

Yeah, you can go on with lots of examples of things that you could mess with people's minds.

We should absolutely do a prediction market that says a quantum computer that breaks ECDSA is built by such-and-such date

because everyone is weighing in on whether or not this will happen, and I think basically, how do we know which people to believe?

Probably a lot of them are just bullshitting, so it would be nice to have this prediction market.

You could see, like, okay, will it be by December 31st, 2026? Will it be by December 31st, 2027, 2028?

You could look at all these prices, and you could see how it's like 0, 0, 0, 0, 0, 99, 99,

and you'd say, oh, it's probably somewhere this year because the people actually building the quantum computer,

there's probably like 20 people somewhere who they really know either that it's around the corner or that it's still 100 years away,

and everyone else is just a layperson compared to this, but this is exactly what the prediction market does and why it's so special.

It converts what is known by the top people in the world to information that everyone in the world has, so that's what it does.

Welcome to Predict. The world is a market. Everything is a market.

Every headline moves the line. Every moment is your market.

Call the moves.

Bet on your instinct.

Your prediction. Your edge.

Dual Bits. Predict. Where everything is a market.

So just on to the potential future of prediction markets, and Paul, you said earlier that at the minute we're not kind of utilizing them to the full potential.

Maybe we could use prediction markets to gain insights into popularity of new Bitcoin proposals or maybe hard forks or something.

Is there anything that you see also within prediction markets that we've maybe not tapped into yet?

I don't know if this – okay, good, it does work. Okay, great.

Yeah, the multidimensional markets are really important, but I already mentioned those.

I think I just want to say we have five or six minutes left.

Not only do I think this is really, really important, and I also built Bitcoin prediction markets back in 2014, 2015,

and then now the company has started Layer 2 Labs. We refreshed that, and we built more of them recently.

So if this topic is interesting to you, you can go with – it's with fake money, fake Signet coins.

But we have – if you go to layer2labs.com, you can check out what we're sort of working on on this.

But yeah, the key thing is the multidimensional markets where you say it's not just will X happen.

It's like if we did A, would X happen, or if we did B, would X?

So it could be everything like if we changed Fed policy – like if we fired Jerome Powell,

what would happen to the price of Bitcoin, or what would happen to the CPI, or what would happen to GDP?

Or if we fired the CEO, what would happen to the stock price?

Or if we fired the president or the ruling party, what would happen to such and such?

So that's the really big payoff.

Yeah, I still think there's a little bit of a bluffing game there.

Like if – suppose we put a decision on should we do a billionaire's tax?

Will the economy contract by 15% in the first year after we enact this billionaire's tax?

But remember, the economy has to actually then contract.

But not if you don't do the – not if you convince everybody to not do the tax in the first place.

There's a way to do these conditional markets where what you do is instead of betting on one square –

this is why I said I wish I had a grid of numbers and all kinds of charts and things.

But you can do something where you basically say I'm going to make – you buy the other three –

you basically kind of like short – you do like one and a half shorts or something.

It's kind of hard to explain.

But I have other slides where I've explained it in the past where it's like –

what you say is I'm going to make a small amount of money unless we do the thing and I'm totally wrong.

And in that way you get – you have people being paid off.

It sort of works out better.

It's hard to communicate it here with only one microphone.

But it's – but, yeah, of course, people will try to spend money to influence public opinion,

and that may include trying to move the market on this.

But all I'm offering basically is saying if they do this, there will be –

so let's say they're manipulating the market.

You will be able to counter-trade it basically and say, OK, listen,

they're making it seem like such and such will happen if we do this.

But you'll be able to extract money from them when either –

because you're going to say I make money either if we don't do the tax

or if we do the tax and the disaster does not happen.

So you'll just be doing that.

That's what you'll be buying for like $0.90, and you'll get $1 for $0.90

because you'll keep winning that bet over and over and over again.

It's easier to explain if there are like –

Is there limitations as well in that a lot of the insights that might be really useful,

what could happen in five, ten years' time,

locking up a large amount of capital in these predictions for five or ten years

could be seen as a waste of capital.

You could be putting your money to work in Bitcoin or other avenues,

but you're having to tie up.

So maybe does that play into the long-term accuracy of these?

It does, I think.

I think it quickly decays after like a year or two years, I think five years.

So I don't know.

There might be some way.

People propose weird stuff of like could you take Dow Jones Industrial Average shares

and like bet in those or something.

And so there's people that have offered things.

You lock up the capital in it.

That's too expensive.

Yeah, low probability events.

They're going to trade just at much larger –

I mean you could make a market like will two United Airplanes crash in the sky today

and the natural price of that or like within the next two years.

And it would be many orders of magnitude larger than the real probability of that happening.

So it would be kind of garbage as far as useful information.

So just to close out, where do you guys see prediction markets in 10 years' time?

Because we can see they're growing very, very rapidly in popularity.

They're seemingly making partnerships, specifically Calcium Polymarket

with every big company in the world.

Do you foresee this continuing or are we going to hit a roadblock?

I read about them at first.

Hal Finney used to post on Robin Hanson's blog back in 2004,

and I knew from 2004 that they would be really big,

and then now we've had Calcium Polymarket.

I always knew they'd be big, and I think they will get bigger.

And I just think the problem is if they get sucked into this gambling distraction,

that would be a little bit of a setback.

But I think much bigger, much bigger.

Whether it's like radio or –

Yeah, I mean I think there's a parallel between like crypto.

Like 10 years ago I kind of had some hope that crypto would be used

for a lot more interesting things than it ended up being used for.

So we could be in the same position.

And they also could be in the same bag as far as it's kind of the same type of

marketing to the audience here, go gamble.

That could be under a lot of hostility in the next few years

depending on who is in charge of the government.

And I mean the blowback makes sense if you're just sort of gambling.

Yeah, I'm actually very worried about gambling addiction derailing the project too early.

So I hope that doesn't happen.

Fingers crossed. Well, that's time for us.

Thank you all very much for attending.

Thanks to Mike and Paul for presenting with me today.

And if you'd like all the information, socials and everything,

you can scan the QR code on the screen.

Thanks, guys.

And every year the stage gets bigger.

Sound money center stage.

So where do you go to celebrate the next chapter in Bitcoin history?

You come home.

Nashville, July 2027.