The rise of prediction markets is reshaping the information economy, incorporating technologies like blockchain and artificial intelligence (AI) to enhance scalability and reliability. Platforms such as Polymarket and Kalshi are gaining traction, attracting attention from traditional betting firms and technological investors alike. Notably, Goldman Sachs is exploring how it might engage with this emerging sector, as stated by Chairman and CEO David Solomon on January 15, 2024.
The fundamental premise of prediction markets is that information can serve as an economic primitive. In an age marked by uncertainty and rapid change, these platforms aggregate and price collective beliefs, which could translate into real-world value. However, challenges persist, particularly with the increasing complexity of the questions posed. As the volume of inquiries expands, the capacity of these systems to resolve them effectively is under pressure. While straightforward markets can be automatically settled, intricate issues involving ambiguous outcomes and contested facts require nuanced judgment.
Blockchain and AI: A New Frontier
The convergence of blockchain technology and AI is seen as a potential solution to these challenges. According to a post by venture capital firm a16z, the upcoming years may witness crypto evolving into a versatile toolkit for coordination and verification across various industries. This evolution could significantly benefit prediction markets by enabling decentralized resolution mechanisms and verifiable computation, addressing bottlenecks that have historically limited their growth.
A key aspect of this development is the advancement of cryptographic proofs, such as SNARKs (Succinct Non-Interactive Argument of Knowledge) and zero-knowledge proofs. These technologies, once confined to blockchain validation, are now being repurposed to shift discussions about information from “Who do we trust?” to “What do we verify?” This shift could transform the role of prediction markets from mere betting platforms to essential tools for validating and challenging information.
One of the most ambitious applications of this technology is the concept of “staked media,” where public claims—including journalism and analysis—are paired with on-chain commitments, thereby adding an economic incentive for credibility. Furthermore, AI systems could serve as adjudicators within prediction markets, assessing evidence and delivering judgments on disputed outcomes. This use of AI could streamline operations and reduce the burden on human moderators.
Regulatory Challenges and Market Growth
Despite the promising technological advancements, prediction markets face significant regulatory hurdles. While many platforms operate under federal licenses issued by the Commodity Futures Trading Commission (CFTC), their rapid growth poses challenges to existing gaming regulations. A notable case involves Kalshi, which is currently confronting a preliminary injunction that may prevent it from offering sports-related event contracts in Massachusetts. A hearing set for January 23, 2024, will determine the implementation of this ban and the potential for appeals.
Amid these regulatory challenges, the events contract market continues to thrive. Robinhood’s CEO, Vlad Tenev, reported in November 2023 that the company has doubled its volume of prediction contracts each quarter since launching its platform in early 2024, surpassing $2 billion. Similarly, Coinbase expanded its prediction market services by acquiring The Clearing Company in December 2023, while DraftKings entered the space with the launch of a dedicated app, DraftKings Predictions, offering event contracts across 38 states.
As the landscape of prediction markets evolves, the future remains uncertain. Nevertheless, the emphasis on better tools for pricing collective belief suggests a growing recognition of their potential value in navigating an unpredictable world.
