Key Takeaways
- Vitalik Buterin argues prediction markets are unappealing for hedging as they offer no interest on deposits.
- Polymarket saw July trading volume drop to $1.06B, down from $1.16B in June, but active traders rose.
- Researchers note smaller trades per user but steady growth in market diversity and user base.
Buterin Highlights Structural Weakness in Prediction Markets
Vitalik Buterin, Ethereum co-founder, has indicated that the structural design of prediction markets leads to their failure in terms of interest payouts and thus renders them “very unappealing for hedging.” In his post on Farcaster, Buterin elaborated that in order to be part of those markets, traders are asked to sacrifice the guaranteed yield of about 4% annual percentage yield (APY) from stable dollar-denominated assets.
The flaw in the design, according to him, is the one that keeps users who want to hedge their risk and at the same time have steady returns away. He went on to say, “I also think volumes will never be as high as they would be under that solution, and that will lead to a great number of different applications for hedges.”
Polymarket Trading Volume Declines but Users Rise
Buterin’s comments were made at a time when Polymarket, an account of a prediction market with high activity, reported a decline in trading volume. The Block’s dashboard reports that one-month volume of Polymarket got from June to July decreased from $1.16 billion to $1.06 billion.
The number of active traders, however, increased from 242,340 in June to 286,730 in July, indicating that although average trade sizes have decreased, there is still a strong interest by retail participants.
Researchers Note Changing Trading Patterns
A research paper authored by Brandon Kae and Ivan Wu made a point that “the average user traded smaller in July even as the platform’s total users grew.”The implication is that more users are coming to the market, but they move their money cautiously, possibly affected by the concerns raised by Vitalik Buterin.
It is interesting to note that new markets on Polymarket are growing day by day. The rise of new markets also indicates that the platform is diversifying its market beyond politics, which is still the main interest of users. Expanding the range of categories available to trade is a direct reflection of the desire of the platform to attract more users and be less vulnerable to the volatility of the market.
Interest Payouts Could Unlock Hedging Potential
Vitalik Buterin criticism is just at the center of the issue in the design of the prediction market, namely, that such markets lack the ability to compete with passive projects that generate yield. For instance, fully decentralized stablecoin savings accounts and DeFi protocols are offering annual6 percentage yields close to 4%, which is the reason why prediction markets without similar incentive programs show less activity.
Prediction markets leveraging such mechanisms might become the next generation of sophisticated traders’ firewall as they potentially gain large-scale institutional reliance and even the retail community. Simply put, these features could be the foundation for such markets to stabilize their periodic inflow of capital and therefore to experience long-term growth.
Summary
According to Vitalik Buterin, the lack of interest payouts makes prediction markets ineffective for hedging, even though they are witnessing user growth, as in the case of Polymarket. While trading volume has decreased in July, the number of active users and new market categories have increased, indicating a wider participation. It has been recommended by analysts that adopting a yield-bearing structure may provide the turning point to prediction markets as a stronger financial instrument, thus allowing for a larger user base and higher liquidity.
Also Read: Kraken Uses SSV Network to Boost Ethereum Staking Security
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