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As prediction markets can be used as a way to gamble and trade synthetic versions of stock/commodities (even if it’s far from being their more exciting usecases), it is unsurprising that they caught the attention of the regulators. We saw two ways where it led to project failure:
  • Overresponding to the regulatory environment.
  • Underresponding to it.
Overresponding Web2 prediction markets have generally been overresponding, the best example is PredictIt which thought the approval of US regulators as an experimental project. This led to the project having an extremely low trading limit of 850$ per market and per user preventing it to work as a free market (extremely successful actors have limited influence on the markets and the amount traded are too low to justify the existence of professionalised actors). Worse, the regulators are trying to shut down the project1, showing that the regulatory road is subject to the whim of bureaucrats and politicians . The other way to overrespond is to make systems which are so « decentralized » that they are unusable. An example would be Augur, whose contracts were purely permissionless, so permissionless that when they had to be updated, the only way was to shutdown the previous version for people to migrate to the new one which led to a downtime of TIME years (and broke long term markets). Another example would be the Gnosis team which created Omen, but instead of putting it under their governance gave it to another DAO (dxDAO) which wasn’t aligned with their interests and ultimately abandoned it. Underresponding Other projects have treated prediction markets as a regular business. A good example would be Polymarket who was acting both as a developer, front end host, liquidity provider and oracle for its markets while operating as a classic company. It received a fine of 1.4 M$2 which at the time was even higher than the total liquidity of the platform. Note that since the incident there has been some improvements. We will see in the Decentralised Governance section how those issues can be solved.

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References

Footnotes

  1. How betting platform PredictIt’s legal struggle could hamper regulators and hurt regulated firms — Connor Raso, Brookings Institution (2023) ↩
  2. CFTC Fines Crypto Betting Service Polymarket $1.4M for Unregistered Swaps — CoinDesk (2022) ↩