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Etheruem Founder Buterin Says Prediction Markets ‘Healthier’ for Participants than Standard Markets

Vitalik Buterin, a co-founder of Ethereum, feels that event contract exchanges are healthier choices for participants and that prediction markets expose traders to risk levels similar to those found in equity markets.

The co-founder of the second-biggest cryptocurrency recently praised the truth-seeking potential of prediction markets in a social media post. This is something that the industry and its supporters have long touted, but he also pointed out that this type of market participation is less vulnerable to the different types of manipulation that occur in traditional financial markets.

"I actually find prediction markets to be healthier to participate in than regular markets,” observes Buterin. “A key reason why is that prices are bounded between 0 and 1, so they are much less dominated by reflexivity effects, ‘greater fool theory,, pump-and-dumps, etc.”

His remarks coincided with growing criticism of insider trading on prediction markets, which is much harder to regulate than illicit transactions on traditional financial markets because to the lack of relevant regulations and legislation.

Buterin asserts that the risk of the prediction and equity markets is similar

The worst-case scenario in prediction markets (PMs), according to Buterin, is that participants would be motivated to create unfavorable occurrences in order to make money, but he notes that this is only a theoretical assumption. Additionally, he postulates that the risk profiles of yes/no exchanges resemble those of equity markets.

“Many of the downsides of PMs are replicated by regular stock markets, eg. if you are a political actor with a ‘CAUSE DISASTER’ button, then you could be motivated to press it simply by shorting all the stocks, which have far higher volume than the PMs,” he said.

Critics who claim that the distinction between investing and wagering is becoming more hazy and that prediction markets play a significant part in that situation may get more alarmed by the similarity to traditional investing.

Prediction markets are instruments that can help Americans "get ahead," according to Coinbase Global CEO Brian Armstrong's recent post on X. This statement sparked a number of comments ridiculing the idea that event contracts will improve users' financial profiles.

Buterin claims that social media is the competition

According to Buterin, prediction markets are instruments for revealing the truth, and as more traders participate, the evolution will provide probabilities that more accurately capture the uncertainty of market participants on particular events as well as improved truth-seeking abilities. Additionally, he believes that social media is a more pertinent analogy for platforms used in event contracts.

“The thing to compare them to is social media. In social media, lots of people talk about ‘THIS WAR WILL DEFINITELY HAPPEN’ and scare people, and there’s no real accountability: you gain clout in the moment (and that clout is often very monetizable clout!), and no accountability after the fact,” concludes the Ethereum co-founder.