Incentives & Illusions in Prediction Markets | Bitcoin 2026

Hello. How are we doing? All good. >> All right. >> Good to >> 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 Leia to 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? >> Uh, yeah. I'm my name is Paul Stoz and um I've been an advocate for prediction markets on BTC since like the year 2013 or something. And this is the prediction market is an incredibly important technology that no, not a lot of people have realized how important it is. It's really like a new form of of media if you really think about it. And it's sort of like you you would be in the same category as like radio, the printing press, smoke signals or something. And prediction market is special because it lets a large number of people disagree and it produces one outcome without like favoring any person arbitrarily. So we have this slide here. I don't know if people can see. >> They can see it either side. >> Okay. Yeah. Um and so yeah, a prediction market is in uh to keep it short is you you it's a basically a contract on an event and it's you have these events of like will the Republican party win the next election. It would 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, um, you kind of have to get a phone call from someone who asks you a question and you might not be the expert. Um, prediction markets are great because they're going to incentivize people who at least believe they know something um about the topic to go engage. um and add to the add to the uh I guess market add to the diversity of uh the the bets that are being placed. Um you know polls polls are just a data point. Um and they don't give you a probability of the event and you have to kind of handicap those. Um you know there's 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 like 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. Um, 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 of the event if you think uh it's something is selling for 70. You know, there's a joke on some of the prediction market sites where they say something like they're selling dollars for.7 where they think this this is certain to happen. They had one about like will Jesus Christ return. There was a a colorful example on on Poly Market. It was like will Jesus Christ return and that's paying that was trading at 5 cents. But if you flip it and you bet on no then that's 95 cents on no. So they're selling dollars for 95 cents and you can you can make money by correcting the price towards towards zero which seems 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? Oh um well gambling uh I think with gambling there's no um like the prices are fixed and in 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 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 marker 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 uh or if you you know like the odds it's just going to pay 35 to1 and your odds are just whatever it is. It depends on how many green squares but it'll be like 38 to1 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 an 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. uh 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 Michael, would you agree that it's a little bit more than gambling or at the minute is that kind of where the market is? Um well, yeah, unfortunately I think that's the most salient thing going on right now because everybody's betting on sports and elections and um 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. I just let people try to think about things and understand them. When you when you bet money um 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. Um, and hopefully, you know, you'll have people saying less stupid things. Um, it's kind of thing I wish like we had these in COVID. Uh, you know, we had people out there saying that COVID was going to be um over in April 2020. I wish that person would have bet out their wealth on that and we could have uh um collected the Denning Krueger tax. But um I mean there there's a number of of like things like this where I where uh you know issues where people don't really think about something until you you put a little money on it and then you have to kind of like ask yourself oh you know this the you know the the experts were actually kind of probably right but here's where they might be a little bit wrong. Um and I think that's that's useful. I this is this is why I want to see them because it 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 if it's not gambling then if we're I mean we're at 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? Um I think that actually yeah this is correct that unfortunately most of the actual use the application of prediction markets in practice today is is gambling on sports and things like that which I think is I think is a mistake and sort of 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 uh 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 the bigger the bigger picture and all 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 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 of people like trying they're kind of taking a 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 the really cool new stuff. In particular, what Robin Hansen, Professor Robin Hansen called the decision markets or what I call the multi-dimensional markets where you 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 if we or one would think 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 problem with something like that? So those would be much more interesting um applications. >> Okay. And I know for myself and 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. Poly Market came out and said, you know, they were unbelievably accurate, far beating the polls. And Micah, I know you have a little bit of push back on this. Maybe they're not quite as accurate this social consensus as maybe many are led to believe. >> Yeah. Um, they actually did pretty poorly. I mean, the uh they gave Donald Trump a 27% chance of winning the the uh the popular vote and he won the popular vote and like giving him a 27% chance that that's not like evidence that you know something that we don't all know. Um 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 a after all the results are coming in. Um, and the people that are, you know, they have their models and they're they're plugging them in and they're they're driving the markets like really quickly towards, you know, 98% while the New York Times was still kind of like like, you know, slow, but there's only there was only this very small window of time where I guess the New York Times knew less than the markets. Um, the markets gave Trump a 57% chance of winning. I mean, poly market for example, um, the day of the election, uh, like Nate Silver called it basically a tata. So it's this is really almost indistinguishable um in statistical terms. You'd have to do like uh you know many many trials to actually determine if this is like a really significant edge that the markets have. Um yeah 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 um dominated the conversation about prediction markets over the last two months. I think really it's bizarre. It's a it's a it's an interesting situation because the 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 no for 7 95 cents and it would be pay off a dollar. Um 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 the prediction market is, you know, 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 are ways around that criticism by like for example subsidizing the the market and stuff like that. So um 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 you know the casino world it's very fair. You know everyone gets the same when you sit at the roulette wheel you know you 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 in trade. I think I don't know, but I think that that was kind of a little bit of a joke like to say in trade, like insider trading or something. But yeah, I think the information the 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." Um and so I understand why it uh hits people emotionally, but it's actually not the right way I think to think about what's happening. >> Yeah. Um I mean insider trading I think early days when they were talking about was sort of the point. I mean there's a lot of uh a lot of use cases like you know um predicting what what CEO is going to go down for embezzlement or sexual harassment or you know things like that which it might be hard to do if you just went to HR. Uh you could start a prediction market. There's a lot of, you know, whistleblowing, those kind of things where you can just kind of get information into the public and it's it's a new channel for that. Um, that you might not have if you just have that information. Um, the the I think people are going to bet um I I don't think you need to subsidize the market because >> you don't, which is great. That's very convenient for people who like prediction market because then you have all these people giving, you know, adding the liquidity and giving money essentially subsidizing the u the informed traders. So it's it's very convenient. Yeah. >> Yeah. There was a paper I saw like a couple weeks ago um that said, you know, like 3% of the traders basically make all the money. Um which there was there was a I I didn't quite understand fully the meth meth methodology of like how they describe these people as accurate because it's kind of like saying, you know, the the uh the team with the most points at the game at the end of the game um has a pretty good chance of winning. um because the the 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 uh everybody makes their bets and you get this kind of general uh idea which is actually pretty good. People on average are really good at predicting things. Um, like we have this uh, you know, wisdom of the crowds. It's like um, Gton's ax phenomenon where you know they they uh, Francis Gton asked a whole bunch of people to guess the weight of an ox and he took the average and they basically nailed it. Um, and so this is, you know, getting people kind of activated. >> He had to he made people pay I think it was like six pennies or something to discourage like joke answers which I think is there's a tiny little bit of a prediction market. like it wasn't quite the same, but it was like he did have to he made people pay actual money to like submit and he gave him a prize to whoever was closest. So there was a tiny prediction market dimension to that even though that's often well yeah sorry for interrupting >> right but there there was no actually like invisible hand sort of like guiding guiding the market to the truth. It was just like people are pretty good at guessing. Um 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 um and then get that little bit of uh alpha. Um sometimes just I mean like this is what happened in the election night is is the people that were really had the good models and they knew how to take the results that were coming out of all the uh the precincts and plug them into their models. They they got they got to 98% before everyone else did. Uh I would like to add one thing about the uh the insider trading phrase as being like a negative like emotional phrase which is like which 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 the roulette wheel or whatever it's kind of like you do everyone has the information because there is no information or if you bet on flipping a coin. So I just wanted 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, you know, how do you know before the fact you uh which which which it is. So I >> I guess the next point from there would be it kind of brings some game theory into things because now that there's 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 haird dryer next to the sensors. Is this just incentivizing more deception rather than trying to actually gain more accuracy in in finding the truth? >> Well, I mean there's always like uh Goodart's law and Campbell's law which if you use any and this is why I I don't think uh futarchy or decision markets are a great idea. Um because if if you use anything as uh you know actionable um that number is going to have value and it's going to have value to move it. Uh so you can you know people can put more money on an outcome if that's going to pay off for them. Especially if it's a conditional thing like if if this happens um then this happens. If you you can kind of bluff uh you can say that's never going to happen. um and then maybe the outcome won't happen by the fact that you've you've uh bet against it. >> Uh well, my view is actually the decision markets are much much harder to bluff. So like if the 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 demoralized 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 if we would like would we go on to win or if the a different way would be if the you know if the the Democratic party or the blue party you know won the election what would happen to GDP? Now you have to bet 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 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 like an exponentially large amount of money at this. So I it does become like um I actually think it becomes more difficult but I I it's very hard to explain without slides and like a big grid of numbers and like charts and stuff which we don't have here right now. Um >> so 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 kind of hedge your bets? Maybe you 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 kind of mitigate your losses to some extent. >> Yeah this is a lot of uh a lot of areas for like uh cloak and dagger stuff. I mean if you know maybe today and you know China has started mining his bitcoins um you know maybe they're not going to tell anybody. They're going to mine as many as they can. Um, and maybe, you know, if if they think it's leaking, uh, they, you know, could could wait until 2027, right? I mean, January 1st, 2027 or whatever. Um, you know, there's lots of things you can do. Um, like you could, you know, if I suspected that somebody else was mining Satoshi's coins in secret, I could go put uh 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 who's leaking information. Um there yeah there's there's there's you can you can go on with like 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 you know I think basically the who 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. It would at least 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 these prices and you could see oh it's like 000000 999.99 and you would say oh it's probably somewhere this year because the the people actually building the quantum computer you know 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 we everyone else is just a lay person compared to those but this is exactly what the prediction market does and why it's so special. It would it converts the what is known by the top people in the world uh to information that everyone in the world has. Um 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. Uh 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. Um, yeah, the multi-dimensional markets are really important and uh but I already mentioned those. I think I just want to say with the we we have, you know, five or six minutes left. Um uh not only do I think this I think this is really really important and I also built Bitcoin prediction markets back in 2014 2015 and then now the company I 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 with it's with fake money, fake signet coins, but we have uh if you go to layer2abs.com, you can check out like what we're sort of working on on this. But yeah, the the key thing is the multi-dimensional markets where you say it's not just will 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 um if we changed Fed policy, what if if the Fed did uh 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 the president or the ruling party, what would happen to such and such? So, that's the that's the really big payoff. >> Yeah, I still think there's a little bit of a a bluffing game there. Like if um suppose we put uh a decision on should we do a billionaire's tax, you know, will will the economy contract by 15% in the first year after we enact this billionaire's tax. Um >> but remember the economy has to actually then contract >> but not if you don't do the not not if you convince everybody to not do the tax in the first place. No, there's a way to do these conditional markets where what you do is instead of betting on one square out of this why I said I wish I had like a grid of numbers and like 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 um 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. Um it it sort of works out better. It's just hard to it's hard to communicate it here with only one microphone. But it's but it's uh but yeah of course you know people will try people will try to spend money to influence public um opinion and that may include trying to move the market on this. But all I'm all I'm offering basically is saying if they do this there will be so like let's say they're manipulating the market you'll be you will be able to counter trade it basically and say okay 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 90 cents and you'll get a dollar for 90 cents because you'll keep winning that bet over and over and over again. Um it's easier to explain if if there are like >> is there a limitations as well in that a lot of the insights that might be really useful what would could happen in 5 10 years time. Locking up a large amount of capital in these predictions for five or 10 years could be seen as a waste of capital. You know you could be putting your money to work in Bitcoin or or other avenues but you're having to tie up. So maybe does that play into the the long-term accuracy of these? >> Uh 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 have offered things, but I do think it's you lock up the capital and it that's too expensive. >> Yeah. Low probability events. Um they're going to trade just at much larger pro. I mean you could make a market like will two United airplanes crash in the sky today and you know the natural price of that or like within the next two years um and you know it it would be many orders of magnitude larger than the real probability 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 poly market, with every big company in the world. Do you foresee this continuing or are we going to hear a roadblock? >> I read about them at first. Hal Finny used to post on um uh Robin Hansen's blog back in 2004 and I knew from 2004 that they would be really big and then now we've had calcium poly market. 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 very much bigger much bigger >> it's like radio or >> Yeah. I mean I think there's a parallel between like crypto um you know 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. Um, so we could be in the same position and and they also could be in the same bag as far as it's kind of the same type of uh marketing to the audience here. Go gamble. Um, which you know if that that could be under a lot of hostility in the next few years depending on who's in charge of the government. Um, and I mean it's it 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 Micro 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 screen. Thanks, guys. Every year, this community comes together to celebrate, to debate, to build what comes next. 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.