I've only watched some prediction market news from the outside, so forgive my basic question, but are prediction markets supposed to bring in money besides having new entrants bring in cash?
I've often seen prediction markets compared to stock markets, but the stock market is generally positive-sum because you're investing money in profitable businesses that pay dividends. In contrast, if a prediction market begins with 1000 people with $1000 each (and no one else joins or brings in more money), can it ever have more than $1,000,000 in the market?
If the answer is "no, it doesn't generate money", isn't that a big problem for prediction markets as a long-term concept? It means everyone will be fighting over a limited pie, and there will be no reason for the average person to join the prediction market (they just stand to lose their money to the experts). Is this a problem holding back prediction markets now, and are there ideas to fix it?
In a good prediction market design users would not bet USD but instead something which appreciates over time or generates income (e.g. ETH, Gold, S&P 500 ETF, Treasury Notes, or liquid and safe USD-backed positions in some DeFi protocol).
Another approach would be to use funds held in the market to invest in something profit-generating and distribute part of the income to users. This is the same model which non-algorithmic stablecoins (USDT, USDC) use.
So it's a problem, but definitely a solvable one, even easily solvable. The major problem is that prediction markets are basically illegal in the US (and probably some other countries as well).
Also, Manifold solves it in a different way -- positions are used to receive loans, so you can free your liquidity from long (timewise) markets and use it to e.g. leverage. The loans are automatically repaid when you sell your positions. It is easy for Manifold because it doesn't use real money, but the same concept can be implemented in the "real" markets, although it would be more challenging (there will be occasional losses for the provider due to bad debt but it's the same with any other kind of credit, it can be managed).
Thanks, I think I understand your concern well now.
I am generally positive about the potential of prediction markets if we will somehow resolve the legal problems (which seems unrealistic in the short term but realistic in the medium term).
Here is my perspective on "why should a normie who is somewhat risk-averse, don't enjoy wagering for its own sake, and doesn't care about the information externalities, engage with prediction markets"
First, let me try to tackle the question at face value:
- "A normie" can describe a large social group, but it's too ge
... (read more)