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?
I feel like you are mixing two problems here: an ethical problem and a practical problem. UPD: on second thought, maybe you just meant the second problem, but still I think my response would be clearer by considering them separately.
The ethical problem is that it looks like prediction markets do not generate income, thus they are not useful and shouldn't be endorsed, they don't differ much from gambling.
While it's true that they don't generate income and are zero-sum games in a strictly monetary sense, they do generate positive externalities. For example, there could be a prediction market about an increase of <insert a metric here> after implementing some policy. The market will allow us to estimate the policy efficiently and make better decisions. Therefore, the market will be positive-sum because of the "better judgement" externality.
The practical problem is that the zero-sum monetary nature of prediction markets disincentives participation (especially in year+ long markets) because on average it's more profitable to invest in something else (e.g. S&P 500). It can be solved by allowing to bet other assets, so people would bet their S&P 500 shares and on average get the same expected value, so it will be not disincentivising anymore.
Also, there are many cases where positive externalities can be beneficial for some particular entity. For example, an investment company may want to know about the risk of a war in a particular country to decide if they want to invest in the country or not. In such cases, the company can provide rewards for market participants and make it a positive-sum game for them even from the monetary perspective.
This approach is beneficial and used in practice, however, it is not always applicable and also can be combined with other approaches.
Additionally, I would like to note that there is no difference between ETH and "giving a loan to a business" from a mechanism design perspective, you could tokenize your loan (and it's not crypto-related, you could use traditional finance as well, I am just not sure what "traditional" word fits here) and use the tokenized loan to bet at the prediction market.
Yes, the total amount will still be the same. However, your money will not be locked during the duration of the market, so you will be able to use it to do something else, be it buying a nice home or giving a loan to a real company.
Of course, not all your money will be unlocked and probably not immediately, but it doesn't change much. Even if only 1% will be unlocked and only in certain conditions, it's still an improvement.
Also, I encourage you to look at it from another perspective:
What problem do we have? Users don't want to use prediction markets.
Surely, they would be more interested if they had free loans (of course they are not going to be actually free, but they can be much cheaper than ordinary uncollateralized loans).
Meta-comment: it's very common in finance to put money through multiple stages. Instead of just buying stock, you could buy stock, then use it as collateral to get a loan, then buy a house on this loan, rent it to somebody, sell the rent contract and use the proceeds to short the original stock to get into a delta-neutral position. Risks multiply after each stage, so it should be done carefully and responsibly. Sometimes the house of cards crumbles, but it's not a bad strategy per se.