Why Bitcoin-Settled Prediction Markets May Be a Sensible Guess – Decrypt

Think about putting a guess on whether or not a politician wins an election, not in USDC or {dollars}, however in Bitcoin—and when the guess resolves, you don’t lose your publicity to Bitcoin’s worth.

That’s the provocative case made in “Bootstrapping Liquidity in BTC-Denominated Prediction Markets.” The paper means that for a lot of customers, BTC settlement isn’t only a area of interest desire—it might truly ship superior economics.

The creator, pc scientist and guide Fedor Shabashev, begins with a critique of the established order. Most on-chain prediction markets, like Polymarket and Myriad, denominate in stablecoins. This avoids volatility however forces Bitcoin holders to swap their BTC for one thing that doesn’t admire. (Disclaimer: Myriad is a product of DASTAN, Decrypt‘s mum or dad firm.)

Over time, meaning lacking out on worth if BTC rises. There’s additionally what the paper calls an “alternative value” relative to what stablecoins provide (typically little or no yield) and what fiat rates of interest may give.

“Whereas denominating prediction markets in stablecoins reminiscent of USDC avoids publicity to Bitcoin volatility, it forces Bitcoin holders to transform and endure alternative prices relative to BTC appreciation,” Shabashev wrote. “Treating BTC as a deflationary settlement asset analogous to gold below the classical gold commonplace affords customers publicity to long-term appreciation as an alternative of mere fiat stability.”

Shabashev explores 3 ways to bootstrap liquidity in new BTC-based markets: cross-market making (hedging and mirroring stablecoin markets), DeFi redirection of trades (leveraging current stablecoin liquidity by way of conversions or artificial publicity), and automatic market makers (AMMs) native to BTC-settled markets. For every, he dives into danger profiles (exchange-rate swings, slippage, everlasting loss, capital calls for) and the way they have an effect on customers and liquidity suppliers.

The conclusion: BTC-settled prediction markets are possible and even engaging below many circumstances. However they require cautious design trade-offs, particularly round the way you present liquidity with out exposing customers or makers to outsized danger.

When Bitcoin settlement might make an enormous distinction

To light up why this isn’t simply summary, listed here are a number of instances the place BTC settlement might ship a noticeable edge:

• Lengthy-dated political occasions: Suppose there’s a market on who wins the U.S. presidency in 2028, however it’s 2025 now. For somebody holding Bitcoin, staking BTC reasonably than changing to a stablecoin permits them to take part whereas retaining publicity. If Bitcoin rises considerably between now and the end result, then the BTC-settled guess affords extra upside (or conversely, extra danger).

• Crypto-native communities: For customers who’ve their portfolio in BTC or consider in crypto as worth storage, stablecoin payouts really feel like giving up a part of the thesis. Providing BTC settlement aligns incentives. These customers could also be extra trusting (or extra prepared to just accept danger) for BTC rewards.

• Markets in locations with unstable fiat or regulatory issues over stablecoins: In jurisdictions the place fiat inflation is excessive or stablecoins are regulated tightly, BTC-settled markets may provide a extra trusted settlement asset, assuming authorized/regulatory readability.

• Occasions with small payoff home windows or unstable durations: For instance, markets round macroeconomic indicators or main coverage selections the place settlement is months or extra away. Volatility issues extra in these instances; BTC denomination turns into extra related.

What to be cautious of

Bitcoin settlement carries actual danger. If Bitcoin crashes throughout the guess interval, then somebody holding BTC-denominated shares may see a steep worth drop in fiat phrases. Liquidity suppliers endure extra in unstable environments, particularly below AMM designs with “everlasting loss.” Hedging trade fee danger is nontrivial. And authorized or tax therapy could also be extra sophisticated the place BTC is worried (capital achieve, asset classification, and so on).

Consumer interface, transparency, and clear danger disclosures turn out to be essential. Bets that learn simple when denominated in stablecoins can look unpredictable as soon as Bitcoin’s volatility will get baked in.

Likewise, whereas “Bootstrapping Liquidity in BTC-Denominated Prediction Markets” lays out a considerate framework, the evaluation is basically theoretical. There are not any actual‐world, BTC-settled prediction markets working at scale but, thus no case research with vital commerce volumes or lengthy‐time period person habits knowledge.

This implies we don’t but see how sensible implementation points—interface delays, regulatory friction, latency, person misunderstanding—will form outcomes. The modeled dangers are actual, however how they match up with messy, unpredictable human habits stays open.

The paper additionally assumes favorable situations that could be onerous to copy. Its prediction that cross-market making yields comparatively low danger depends on having skilled market makers or platform subsidies in place. If these are absent, then the danger for normal customers or smaller markets turns into considerably larger.

Volatility and trade fee danger, whereas mentioned, could also be under-quantified—particularly in moments of stress when hedging devices could also be skinny or costly. Equally, capital-inefficiency seems manageable in excessive‐quantity eventualities, however in skinny, early markets, slippage and “everlasting loss” (in AMMs) might render a BTC‐settled contract unattractive.

Lastly, person expertise and regulatory/tax implications are solely cursorily addressed. A contract paying out in BTC could result in confusion or sudden legal responsibility (for instance, tax occasions or asset classification), particularly for customers used to considering in fiat phrases, which might hamper adoption or expose platforms to danger.

Backside line

The “Bootstrapping Liquidity” paper makes a compelling case that for a lot of use instances, settling prediction market contracts in Bitcoin might outperform alternate options—particularly stablecoins—by preserving BTC publicity, aligning incentives, and probably attracting extra crypto-native liquidity.

Nonetheless, it isn’t a panacea. It calls for good market design, aligned incentives, and danger mitigation. However because the crypto market matures, BTC-denominated prediction markets may not simply be potential—they might turn into smarter.