With decentralization, will the Wisdom of the Crowd get a fair shot?

This newsletter coincides with our analysis on Decentralized Prediction Markets. You can find that analysis here.

When you hear the words ‘censorship’ or ‘regulation’ — especially when they appear next to the word ‘centralization’ — your crypto ears should perk up almost immediately. In that regard, gambling and prediction marketsreek of the potential for decentralization. Central authorities deciding the outcome of events, both burdened by government regulations? What’s not to like?!

Quick definitional side note: in brief, prediction markets are economic ‘games’ that mix the dynamics of the stock market and event-based betting.

Unsurprisingly, the gambling and prediction markets have attracted the interest of a meaningful section of the crypto community. In our research, we have identified over 50 companies that tackle decentralized gambling or prediction markets:

With our latest Crypto Assets report (“With decentralization, will the Wisdom of the Crowd get a fair shot?”), we have refined our coverage of this category to focus on Decentralized Prediction Markets.

So what makes us focus on prediction markets rather than pure betting and gambling platforms?

For two reasons primarily. First, the top four general prediction markets have a cumulative market cap of ~$750m (as of yesterday, February 13, 2018). Augur has the 15th highest market cap of all classified ‘tokens’ listed on coinmarketcap.com (also as of yesterday). The largest gambling platform (FunFair) ranks at #40 among tokens and has less than half the market cap of Augur.

Second, these crypto platforms have not only attracted qualified teams, they’ve also attracted a list of high profile advisors such as: Vitalik Buterin (co-founder of Ethereum), Joe Lubin (co-founder of Ethereum and Consensys), Elizabeth Stark (co-founder and CEO of Lightning), Patrick Dai (founder of Qtum), and Ron Bernstein (founder of failed prediction markets: Intrade and TradeSports).

Where there’s smoke there’s usually fire, right?

Regulation. Centralization. A market cap close to $1b. Stark, Lubin, and Buterin. Who would turn this case down? Why are big-name industry players attaching their names to these projects? Why does the market cumulatively value these platforms higher than a number of other token-based platforms?

We see a few balancing factors. While prediction markets lie adjacent to big, established markets such as futures trading and straight-up sports betting, we are not completely sold that the economics and incentives of a decentralized prediction market will be sufficiently compelling to penetrate existing markets meaningfully.

That said, as numerous prediction markets have shut down (or been shut down) over the past decade, and given that the platforms that persist use “play money,” decentralized prediction markets have effectively created a new market opportunity. True prediction markets cannot effectively exist without a decentralized approach. And that leads us to think hard about what could be.

• If you hold the belief that prediction markets could carve a sizeable chunk out of legal sports betting, then perhaps it’s worth betting on prediction markets. After all, sports betting has a high ceiling: legal sports betting is a $25b market.
• If you believe prediction markets can provide infrastructure support to the dApp ecosystem — such as providing crowd-sourced actuarial estimates for the decentralized insurance platforms — then prediction markets could grow to become something even larger and potentially penetrate significant, existing financial markets.

We are of the view that this is a category that merits ongoing mindshare allocation. For our breakdown of decentralized prediction markets, their incentive structures, and their token valuations, you can find our report here.

Happy Valentine’s Day!
Rad.Crypto