Crossing the Chasm
The cardinal rule to market efficiency: the more liquidity available for a market, the more it attracts market participants, the more efficient the market gets, and the more accurate its prices will reflect the reality of its underlying asset. This applies to bond markets, currency markets, stock markets, and especially prediction markets, for which its entire premise lies in its ability to report accurate probabilities for a particular event or outcome.
“Liquidity is by far the biggest issue. When markets are illiquid, they are inefficient, which then calls into question whether they are indeed a source of truth. The more liquid a market is, the more efficient and ‘truthful’ it becomes.”
For prediction markets to grow beyond being just a quadrennial spectacle (and the plaything of nerds) to be a regular fixture in people’s lives and become their go-to authoritative source for most event probabilities, entails moving away from the design of first-generation prediction markets. First-generation protocols, where liquidity provision is a loss-making gambit (and hence constrains liquidity provision to centralized entities with ulterior motives), is simply inadequate for a future where you want prediction markets to become a staple of people’s information diet — the decentralized onchain source of truth spanning hundreds of concurrent world events.