Ethereum co-founder Vitalik Buterin wrote that prediction markets are a "healthier" public information tool than social media, as they can reduce emotional manipulation through probability pricing.
However, Leo Zhang, founder of Prediction Market 42 and Alkimiya, frankly stated that the current operation of prediction markets is not based on the Platonic "wisdom of the masses" he describes, but rather on a false impression created by VC subsidies to market makers, more like a sports lottery disguised as options.
Vitalik's Platonic Market Prediction: Ability to See the Truth and Stabilize Sentiment
Vitalik sees prediction markets as a solution to democratizing information and resisting the distortions prevalent on social media. He believes that prediction markets can make those who make incorrect predictions pay the price, allow the market to get closer to the truth through repeated betting, and provide a more reliable emotional stabilizer than fear-mongering news.
I tend to be more level-headed when checking Polymarket after seeing negative news, because the market usually reflects far less "real" uncertainty than the media portrays it.
He further stated that probability scores can reduce price volatility, making prediction markets a healthier environment for participation than the stock market.
The illusion of probability propped up by subsidies: Predicting market stabilization still relies on "burning money".
However, Leo admitted that Vitalik's ideal model remains in textbooks and is far removed from reality: "Today's prediction markets can only function by relying on platforms to subsidize market makers with VC funding to provide artificial liquidity."
Market makers, lacking the ability to hedge against real-world events and sufficient data for modeling, cannot sustain inventory risk in the long term without subsidies.
In other words, the so-called "price = probability" is not a collective wisdom naturally generated by the market, but an illusion created by subsidies.
( Kalshi Research: Market Prediction "Inflation Forecast Accuracy" Outperforms Wall Street Analysts )
Focusing on the liquidity desert: The most predictable events are the ones that no one is trading.
Leo went on to say that, theoretically, market prediction should "transform private information into public information," which is especially valuable in technology, startup, or geopolitical risk events. However, because these events are difficult to hedge and the risks are hard to quantify, market makers naturally avoid them.
As a result, the market only has depth in areas that are easier to quantify or have a larger scale, such as sports, political elections, or cryptocurrency prices, while events that truly require market prediction lack liquidity.
He described the numbers on the user interface as making the platform seem like it could predict everything, but most markets are actually dead cities, and these pricing strategies are meaningless.
Probability is merely decoration: a lack of self-awareness makes the market superficial.
Vitalik believes that probability pricing can eliminate bubbles, reduce speculation, and make the market healthier, but Leo argues that this is merely a visual illusion. Users in market prediction are not pursuing "precise probabilities" but rather "profit and loss (PnL)," as evidenced by behaviors such as buying at the end of the trading day (for assets with over 95% stable returns).
Market behavior is short-sighted and arbitrage-driven, with price discovery and liquidity concentrated on popular options and before settlement. Traders lack the autonomy to predict events and place bets, which makes the market more unhealthy and distorted.
Looking at the prediction market: a tool for seeking truth or a way to beautify post-lottery betting?
The differing opinions of the two reveal the gap between the reality and the ideal of predicting the market. Leo also stated frankly at the end of the article:
The current probabilistic narrative is merely a facade built on subsidies and user interface packaging. If we continue to deceive ourselves by chanting slogans like "healthier than the general market," what we will ultimately get is just a beautified sports betting website.
This article, which examines the current state of the market from Vitalik's utopian ideals, first appeared on ABMedia, a ABMedia , highlighting how market makers rely on VC subsidies to create a false impression of liquidity .
