Predictive transparency: Unlocking the door with blockchain
The gambling industry has always been a market of buzzwords; Brazil, sweepstakes, personalisation, AI. You name it – the list goes on. However, one could hazard a guess that never before has one of the hottest topics in the industry been a sector that isn’t actually in the industry.
We’re talking about prediction markets – and they’re red-hot right now. Of course, nobody can predict the future, but with skyrocketing popularity and some of the big-boy US operators now sniffing around the prediction space, it looks by all accounts that, despite the legislative contention faced by some prediction market operators, the practice is here to stay. Indeed, while prediction markets date back to over 150 years ago when farmers would seek to minimise their risks by reading the weather via localised markets, the practice’s affiliation with gambling has only recently become solidified following the US Presidential election.
But how does this all relate to the payments space? Well, while some operators in the prediction landscape have been busy fighting with the Commodities Futures Trading Commission (CFTC) over the technicalities of US law, others have been quietly chipping away to ensure their own compliance is – and will remain – a solid bedrock foundation for growth. How? Blockchain.
Enter Alan Vey, Co-Founder of prediction market Galactic, who explains exactly why this transparent distributed ledger is a match made in heaven for prediction market safety and security. And why it might just have also been the match to light the fuse of prediction markets’ explosive lift-off over the past 12 months.
As a general opening question, how would you define prediction markets within the context of gambling?
I think you can say prediction markets and gambling – at their core(s) – are fairly similar from a user’s perspective. You have an opinion about something that you want to express, that is uncertain, and you want to take a position either for or against that position. In an abstract sense, it’s a similar concept. However, I think the most important differentiating factor is that gambling is a zero-sum game. What I mean by that is the user’s loss is the platform provider’s gain. This is not the case for prediction markets. With prediction markets, preferably everybody wins. From the platform host’s perspective, you’re charging a fee on volume and a fee on winnings, but it doesn’t matter which side the winnings end up being on. In that respect, it’s fundamentally different from traditional gambling.
Prediction markets are decades old economic theory which have never fully taken off because of the lack of transparency. There’s always been a history of the house trying to get that edge. Now, with blockchain, because everything is so transparent – that just doesn’t happen. Prediction markets really are a way of getting as close to the collective crowd’s intelligence when it comes to truth. Whereas in gambling I think things can be a bit skewed. It is also not a zero-sum game. I think those are the key elements where it differentiates itself.
What can you tell us about the way blockchain can be used to enhance transparency and fairness in the prediction market space?
Of course, it depends on how you use the technology itself. There are a lot of instances in the world where people say they use blockchain, but they use it in a way where it’s redundant. If used correctly, blockchain technology essentially acts as the engine for the creation of markets, as well as for people taking positions in those markets. It automatically recalculates the odds based on who’s come in, who’s bought yes and who’s bought no (in the binary scenario) and how much liquidity is within that market.
Because the blockchain is fundamentally taking care of that, you can then build systems that are entirely non-custodial – and I don’t think this concept really exists in the world of gambling today. You have a system where the user, at all times, is in control of their own funds.
You are really just providing a wrapper around blockchain to enable a better user experience for a user to be able to participate in those prediction markets
The fundamental properties of blockchain for anybody to be aware of is transparency on public blockchains, or even proof of authority blockchains depending on how they are set up. What that means is, essentially, all transactions can be seen by all market participants and they’re completely immutable. Nobody can change them. Nobody can show you slightly different data or create a spread. Everything is the way you see it, and these are the properties that that really help in creating these prediction models.
Naturally, people who are new to blockchain and crypto often suggest concerns around security and stability. With prediction markets now emerging into the mainstream, what would you say to a potential customer expressing these concerns?
When we talk about security, we have to look at some of the reasons people would think this technology is not secure, right? Maybe let’s start with the biggest – Bitcoin. There has never been a compromise in the fundamentals of Bitcoin technology. If there had been, Bitcoin would be worth zero today. The thing that has been compromised is the user end. When people create online wallets, you must have a password and, unlike your banking app where if you forget your password, you can just reset it, blockchain doesn’t work like that. If you forget your password, you completely lose your money. Or worse yet, somebody else gets your password and transfers your funds somewhere else, because there are no intermediaries. It’s entirely non-custodial and immutable, that money is gone or those tokens are gone forever. The security here doesn’t come down to the fundamental technology working or not. I think Bitcoin’s $1trn+ market cap shows that the technology can be secure. It’s about how people use it.
So how does this work within the prediction markets space?
If we bring this previous example more tangibly towards our context, the real crux of what we’re talking about is when the users are accessing prediction markets in a non-custodial manner. That means the user is controlling their own passwords to their accounts that have all their funds in them. How do you keep that secure? You don’t want to offer the user experience where somebody has to remember 16 random words to access their password. You want to give people the normal web to experience where they sign in with Google, use their email address and password.
But underneath the hood, you want some clever magic that means that, actually, your email is controlling your wallet on the blockchain. In Galactic’s example, what we have done there is, rather than reinventing the wheel, there’s a concept called embedded wallets from service providers like the one we use, Privy, that have gone through many security audits and have been vetted to make sure they can do their job well. How this happens is via open-source security standards. Open-source security essentially means anybody in the world can read the security code and try to attack it but, because of this, the code must be incredibly robust to survive. Long story short, the code is tried and tested. These are just some of the principles adopted by the companies that are leading the field and are actually able to provide a secure environment.In what way do you think blockchain has revolutionised life for prediction market operators – and how does this differ from its role in the traditional gambling or sports betting industry, for example?
Without blockchain technology, prediction markets may not have taken off
There have been attempts at this in the past by various platforms that have tried to set up prediction markets, but they never saw much success – typically because they mostly converged on the gambling market. People were trying to monetise them in the same way as gambling and the goal was not complete transparency, which meant as an operator you weren’t able to offer no custody. These are some of the key elements around why prediction markets don’t fall under gambling regulations. If you’re not doing custody, if you have complete transparency, this immutable system, and you are not offering contracts on event outcomes, most lawyers recommend that this industry does not fall under gambling regulations. Without web3, without blockchain technology, it’s just not possible to build a system like that.
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