We are watching everything become an extension of the financial markets in real time. People don't yet understand how much change is coming.
May I just add, early on, that a lot of what is happening will create significant friction within traditional governance systems.
I might just be the first person to call it, just as many have expressed when it comes to artificial intelligence and cryptocurrency, prediction markets are going to create governance problems that will require beyond traditional systems of regulations.
But we aren't here to talk about governance, at least not today.
We will focus on something most haven't come to understand.
An Optionized Future
In the past, I've likened prediction markets to perpetual contracts, since being successful at both demands being right about a future event.
Notwithstanding, I've come to settle with “options” — more specially, binary options, as the closest, in likeness.
Binary options are a type of financial instrument where you bet on the outcome of a yes/no proposition about an asset’s price movement within a set time.
Instead of owning the asset (like stocks, crypto, or commodities), you’re simply predicting whether the price will be above or below a certain level (called the strike price) at a specific time (the expiry time). – GPT
There's evidently strong similarities to prediction markets since you're either right or wrong, a case of all or nothing with no flexibility within.
No leverage, no wiggling room within.
As a result, we are essentially looking at a future where most things are optionized.
But what does this mean?
Monetizing the future
I said above that we are watching everything become an extension of the financial markets.
Let me quickly rephrase that:
We are, in real time, making everything into a financial market.
How some of us feel about this doesn't really matter. It is happening.
Prediction markets introduce a novel incentive to experiencing the future.
Rather than waiting for something to happen, you can invest in it and profit when it eventually comes through.
Of course, there's still the possibility of taking a loss, and that is when the future is different from your prediction.
But you see, it isn't going to always be as simple as it might be today. Prediction markets bringing about a new extension of the financial market means that there's now a new layer that can act as added factor of influence to the markets and the world at large.
Prediction markets change the market of information by bringing incentives onto the flow of information and turning future events into something that can be pre-defined at the present.
Certainly, there are lots of scenarios where pre-defining the future isn't quite going to work out, but there's also going to be many cases where it will.
Now, it is important to understand that the term “pre-define” can mean anything from setting rules that influences an outcome to directly effecting the outcome.
This means that a prediction market can serves as a system that influences an outcome and can also directly effect it.
It all comes down to what level of incentives exists, the risks and rewards and if “access” exists to aid direct engagement from participants or if all can be left to external forces.
Let's explore some scenarios to understand this:
Scenario 1:
A football match.
Prediction: A fan will run onto the pitch.
YES | NO
Clearly, there's an incentive for direct engagement here and the risks and rewards + access are generally in favor of participants.
Scenario 2
A social post goes viral.
Prediction: Elon Musk’s next X post will hit 10M views in 3 hours
YES | NO
In this case, the prediction market could indirectly influence randoms running around Elon Musk's profile to monitor if his next post will hit 10M views in 3 hours or not.
It served as an added layer of influence to something secondary.
These are simple examples, but one can expect more complex scenarios, and many may not be pleasant.
The downsides of this is that the larger the incentives stacked up is, the more danger the future can potentially be in.
When we make future events tradable with instant profits payouts, we create an insane amount of incentives for manipulating events outcomes.
Regulating such markets can prove difficult, especially if it all comes to a permissionless layer.
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Thank you for reading!