- Ethereum inventor Vitalik Buterin warns in a blog post that many of the currently popular prediction markets have lost the social benefits they once had.
- Instead of gaining information and preventing real economic risks, it would be about highly speculative bets businessmodel, that to a steady influx of inexperienced players instructed be.
Vitalik Buterin describes the current “business model” of the prediction market as follows: On the one hand, there are well-informed traders who systematically make profits. On the other side are the notorious money losers, whose losses finance the entire system.
Things become problematic at the latest when such prediction markets act as digital backroom casinos and build communities that reinforce false opinions in order to attract more naive players. This creates a cycle that is not sustainable. As soon as speculative interest wanes – for example in a bear market – liquidity dries up and the markets threaten to collapse. Buterin warns that this reliance on gambling-motivated customers threatens the long-term viability of the industry.
Hedging instead of gambling
In order to make prediction markets future-proof, Buterin calls for a return to their actual purpose: risk hedging. He sees great potential in establishing prediction markets as instruments that can be used to hedge against real risks, such as political decisions, supply chain disruptions or economic developments.
He also suggests using AI models that analyze individual expenses and create personalized risk portfolios. These could help customers hedge against price fluctuations or inflation – an approach that would take prediction markets out of the gambling corner.
Price indices as an alternative to stablecoins?
Buterin’s idea of using prediction markets as a basis for new, productivity-based price indices is particularly far-reaching. In the long term, these could even replace stablecoins by reflecting real shopping baskets such as housing, transport and food.
Such a system would be less susceptible to speculative risks and could create a more stable, transparent form of digital store of value. Buterin sees this as a way to make prediction markets a central building block of a decentralized financial infrastructure that offers real economic benefits.
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