Prediction Markets: A World Truth Engine in Beta

Every system for discovering truth (science, journalism, capital markets) runs on incentives. Prediction markets make those incentives explicit.

If you spend as much time on crypto twitter as I do, you’ve been drowned in the noise of prediction markets (PMs). It’s been a chaotic mix of million-dollar election bets, outright speculation, and a lot of badge holders rehashing the same ideas. From the outside, it was easy to dismiss the entire category as another crypto-native casino.

I believe that is a profoundly wrong assumption.

After spending time in this rabbit hole, I’ve come to see that beneath the surface, a fundamental technological primitive is being forged. Prediction markets, in their purest form, are not about gambling; they are about monetizing verifiable knowledge. They are engines for aggregating information, challenging expert consensus, and revealing a real-time, financial truth about the future. They are, in essence, a world truth machine.

But this powerful engine is stalling. For all the hype, the industry is held back by a set of critical, unsolved problems: from creating sustainable liquidity to building a user experience that feels more like a terminal rather than a casino.

That is the purpose of this report. Together, we will dissect the core technology that powers these markets, from the incumbents to the startup disruptors. We will then confront the five most significant unsolved problems that represent the barrier between today’s reality and tomorrow’s multi-billion dollar expectations. Finally, we will look into potential solutions and the new frontier of applications that warrant our attention.

This is the deep dive I was looking for when I started. Let’s begin.

Tool for Truth (and Profit)

At its core, a prediction market is a simple and powerful concept: a market for outcome-contingent shares whose prices reflect the crowd’s estimate of each outcome’s likelihood.

This definition is the key to separating prediction markets from gambling. Gambling is about winning money from a “house” that has set odds against you. A prediction market is about monetizing verifiable knowledge. There is no house to bet against; the platform makes money from trading volume, not from your losses. This transforms the act of forecasting from a bet into a form of intellectual arbitrage.

Was there ever a field you were so knowledgeable in that you would have wagered on your insights against the consensus? For a friend, that niche is hip-hop and wrestling. What might seem like a nerdy flex is, in the era of prediction markets, a monetizable edge. This is the ultimate goal: to allow those with specialised knowledge, in any domain, to profit from their foresight.

For decades, this promise was limited by the constraints of traditional and blockchain infrastructure and regulatory hurdles. I believe the critical unlock for this new generation of prediction markets is the decision to build them onchain.

Important Question: Why Onchain?

If we can’t reliably provide a strong argument for this then we can pack up and go back to trading memecoins. It is important to answer this question especially when a platform like Kalshi proves prediction markets can function without a blockchain. In my opinion, the question isn’t about possibility, but about a philosophical and practical choice.

Global, Permissionless Liquidity: Anyone, anywhere can participate, creating a deeper and more diverse pool of knowledge and capital. Efficient Market Hypothesis requires wide participation from a diverse set of market participants.
Case in Point: Théo, a French trader, participated with high conviction in the prediction markets for the U.S. presidential election. He proved the value of global participation, contributing to market efficiency and earning a reported $85 million profit.
Transparency & Trust: All market activity, from creation to settlement, is recorded on a public ledger, making manipulation by the platform difficult and settlement auditable. Crypto’s pseudonymous nature will lead to insider trading but with upgrades in decentralised ID and ZK verification, we have a credible path to tackling this challenge in the future.
Scalable Composability: This is the biggest unlock. Unlike traditional financial infrastructure, onchain systems are now built for both massive scale and open development. This splits into two key advantages:
1. Market Breadth: Traditional exchanges are designed to serve a small universe of assets; the NYSE, for instance, lists around 2,400 companies. Crypto rails, in contrast, are battle-tested to handle a seemingly infinite supply of tokens and bootstrapping their liquidity alongside their creation. This is essential for a future where we expect millions of prediction markets on everything.
2. Permissionless Building: A blockchain-based platform is not a closed product; it’s an open ecosystem. Any developer in the world can build tools and applications on top of the core market infrastructure without asking for permission. This fosters a vibrant ecosystem of add-on applications from sophisticated trading terminals to fantasy sports games.

The Proof of Predictive Power

The ultimate test of a prediction market is its ability to accurately forecast the future. Simple metrics show high accuracy (Polymarket’s predictions are directionally correct over 95% of the time).

However, this accuracy does not reflect the prediction market’s precision in forecasting events. A more sophisticated measure is the Brier Score that calculates the mean squared difference between the predicted probability and the actual outcome, where a lower score (closer to 0) indicates a better prediction. H/T to Theia Research and Knower for introducing Brier scores and highlighting their importance for evaluating prediction market accuracy, respectively.

Analysis of Polymarket’s historical data reveals two insights:

Accuracy Improves with Attention: The platform’s Brier Score has consistently improved over time, particularly after high-profile events like the 2024 U.S. Election brought a surge of new liquidity and participants. More attention leads to sharper, more accurate markets.

Volume brings us closer to Truth: There is a direct and powerful correlation between a market’s trading volume and its predictive accuracy. Markets with over $10 million in volume consistently achieve the highest degree of accuracy. Liquidity doesn’t just enable trading; it powers the platform’s ability to find the truth.

The predictive power demonstrated by these scores, especially in high-volume markets, is difficult for any single individual or algorithm to replicate. It is the clearest evidence that prediction markets are not just speculative venues; they are powerful world truth engines in the making. For a deeper dive, readers can explore brier.fyi, which shows how this predictive power can vary by platform and market category, highlighting the strengths of each venue.

The Prediction Market Stack

To understand the current landscape, we must dissect the stack from the ground up. While platforms differ in their strategy, they all build upon a similar set of core components.

The Settlement Layer: The foundation of any onchain prediction market is the blockchain it’s built on. The requirements are straightforward: highly secure, high speed and throughput to handle rapid trading, and low transaction costs so that frequent, small-value trades remain viable. This is why most platforms are built on high-performance L1s or Layer 2 rollups.

The Stablecoin Layer: The universal collateral for onchain markets is the stablecoin, typically USDC. This provides a stable unit of accounting and is fundamental to the binary contract structure, where ‘Yes’ and ‘No’ shares must sum to $1.00. The key challenge here, especially for long-duration markets (e.g., the 2028 election), is the opportunity cost of locked capital. The evolutionary step for platforms will be integrating yield-bearing stablecoins, transforming locked funds into productive assets that can generate secondary revenue or be used to incentivize liquidity.

Kalshi already offers interest on users’ open positions and cash, Polymarket has started holding rewards offering 4% yield on open positions across 13 long duration markets. There are also startups like Robin.markets that are looking to bring yield on top of the holding rewards and extending yield to the long tail of polymarket markets.

The Core Logic: This is the engine of each prediction market. These are not minor implementation details; they are architectural decisions that dictate everything from the user’s trading experience to the platform’s capital efficiency and its ultimate position in the market.

What types of events can be traded?
How is liquidity provided?
Who can create markets?
How is truth determined?

These choices made here are the DNA of the platform. Understanding these levers is the key to understanding why the market leaders are designed the way they are, and where the opportunities lie for the next generation of applications. H/T to Baheet for sharing a framework to understand the core components of a prediction market.

Market Type

This defines the fundamental structure of the bet itself. The choice here has massive implications for user experience and liquidity.

Binary Markets: The bread and butter of prediction markets, offering a simple “Yes” or “No” outcome. The two outcome shares are always priced to sum to $1.00 (e.g., a “Yes” share at $0.60 implies a 60% probability). Their simplicity makes them incredibly easy for users to understand and is the primary reason for