Prediction markets that utilize Bitcoin for settlement could be a shrewd wagering choice
In a recent paper titled "Bootstrapping Liquidity in BTC-Denominated Prediction Markets," computer scientist and consultant Fedor Shabashev and Ethereum co-founder Vitalik Buterin explore the potential benefits of Bitcoin-settled prediction markets.
The paper posits that for many users, Bitcoin settlement isn't just a niche preference, but could deliver superior economics. However, volatility, hedging costs, and user risk perception are major hurdles to adoption.
Cross-market making, where stablecoin markets are mirrored and hedged, is one method proposed to address these issues. Yet, liquidity providers may suffer more in volatile environments, especially under Automated Market Maker (AMM) designs with "permanent loss."
The authors argue that treating Bitcoin as a deflationary settlement asset could offer users exposure to long-term appreciation instead of mere fiat stability. They also suggest that Bitcoin settlement could potentially outperform stablecoin-powered platforms, especially in scenarios such as long-dated political events, crypto-native communities, markets in places with unstable fiat or regulatory concerns over stablecoins, and events with small payoff windows or volatile periods.
However, the paper assumes favorable conditions that may be hard to replicate, such as having professional market makers or platform subsidies in place. It's worth noting that there are no real-world, Bitcoin-settled prediction markets operating at scale yet, thus no case studies with significant trade volumes or long-term user behavior data.
The paper also touches upon the opportunity cost of stablecoins relative to Bitcoin appreciation and fiat interest rates, as well as the complexity of legal or tax treatment when BTC is concerned. Hedging exchange rate risk is nontrivial in BTC-settled prediction markets, and volatility and exchange rate risk may be under-quantified.
The authors warn that while the potential benefits are substantial, volatility, hedging costs, and user risk perception remain major hurdles to adoption. User experience and regulatory/tax implications are only cursorily addressed in the paper.
As the world of decentralised finance (DeFi) continues to evolve, the potential for Bitcoin-settled prediction markets to disrupt traditional financial markets is an exciting area of research. The findings of this paper provide valuable insights into the opportunities and challenges associated with this innovative concept.
