Welcome back everyone. I am Cass PNC and I'm joined as
usual by my partner in crime, Mr. Bennett Tomlin.
How are you today? Well, I'm here.
How are you, Cass? Tired.
I don't know.
I don't know what else to say today.
We're talking about prediction markets now.
I think most of our viewers, most people who TuneIn probably
are aware of prediction markets. I don't think we've spent a lot
of time talking about them in general, but I think it's a
really meaningful discussion to have right now because I think
they are a possible instrument that can be used against free
speech and against democratic values.
But before we get into that, I think it's worth talking about
what the difference is between prediction markets and many,
other many other, I don't know, like forms of I, I don't know
what to call it, right? There's gambling, there's sports
betting, there's options trading.
So let's can we, can we help people understand what the
differences are between all of these things?
We can certainly try. Prediction markets at their most
basic are a binary option. You are purchasing a financial
instrument for a certain amount of money that will either go to
100 or 0 at the time the contract concludes.
For most of these prediction markets with that looks like is
you buy a proposition like Donald Trump will say poop four
times within the first three months of his presidency.
And if Donald Trump does say poop four times, you get the 100
and if he doesn't you get the zero.
This looks and feels a lot like other forms of gambling,
especially like prop bets and things like that.
The and again like in sports betting, it looks you can
achieve many of the same things you could with a bookie by
instead going to a prediction market.
The exact structure of your bet, like if you were to break it
down as like a financial instrument, might sometimes look
a little bit different, but practically it ends up working
out kind of the same. You put in a certain amount of
money and at the end if the event goes in your favor you get
more money, or if the event goes against you, you lose the money
you put in. Yeah.
I mean, that's, that's the basic, that's the basic idea.
But I think there's a lot of weird intricacies involved in
why these are classified differently, why some of these
are dealt with by very different, dealt with by very
different regulators and that's worth discussing.
I don't know. I don't know if that delineation
is going to exist in a decade or something, right.
But, but I, I I will say that for instance, Calci is
regulated, Calci is a prediction market, Calci is regulated by
the CFTC. So is polymarket.
Sort of regardless, right. So those are they're, they're
looked at by the CFTC. But then when you have
DraftKings, there's a bunch of state gambling regulators that
are that are overseeing what they're doing and, and if they
mistreat a customer, what, what, what have you.
And when it comes to options trading, it's also the CFTC.
So if you're trading, if you're trading options on Robin Hood or
whatever you, you would, if you wanted to seek relief, you would
talk to the CFTC. But those are, those are
completely different regulators. And, and the main distinction I
noticed and you, you can get into this little get into the
weeds of this more if you want. But the main distinction I'm
seeing between something like DraftKings or FanDuel and
calcium polymarket are that there's the house, that's who
you're playing against when it when you're betting on
DraftKings, or there's market makers, which are who the the
people taking the risk to create markets by putting liquidity in
it and basically getting more people to want to put money into
these markets. Yeah.
And it's not like quite the convenient one to one there that
we kind of wish it was like in a lot of the market on something
like Polymarket or Kel, she may be dominated by a market maker
or something like that. But there is also still like
other retail traders in there who are participating in the
market, whereas like at a bookie that your counterparty is always
the bookie. Like the way a prediction market
works. Like if you go on Poly market
right now and look at one of the markets and it's trading at, say
what? God, I hate that they put their
percentages a 32% chance. Generally that means you can
like buy that asset for like pretty close to $0.32 and sell
it for pretty close to $0.32. They're not always as close as
you might think. They have like up to a $0.10
disparity between bid and ask, and they'll still like just put
your price in between them. And so yeah, you get the asset
and then it either goes to 100 or 0.
And like your counterparty could be a market maker who originally
sold you that, or it could be just some other person who
decided I've made enough for this bet is no longer favorable
and they exited their position. Yeah, I, it's, it's a topic
that's coming up a lot right now because of commodities, another
CFTC regulated, another CFTC regulated group of assets.
And that seems to be an issue right now because silver and
gold have gone so, so high in value have gone up so quickly
that some people are having difficulty selling physical gold
and silver in their local markets.
So liquidity plays a role in Almar, it's in stocks in all of
this stuff, right? Like liquidity is a real, we
used to see it a lot in crypto. Slippage was crazy in, in the
days when we were at the beginning of covering
cryptocurrency when we started in 20/17/2018.
So slippage is very real. And of course it's going to be
real in prediction markets and stuff.
And I, I want to talk about this too, because some market makers
are, I, I, I don't know how to put this, but other than they
have more liquidity, but like market makers do market making
for many, they're different types of market makers and
there's different reasons to get involved in it, right?
Like, yeah, can I like, can you expand on what, like what are
the differences? Why would someone like, I think
I was listening to a podcast today and the guy was, he was
basically describing all the different frauds he's
perpetrated on different prediction markets.
And it was like, OK, he was using very little money to
accomplish these, these gains that he would eventually
acquire. And this was not delta neutral
options trading. This was not a hedge, which you
can get into this, but it it was a guy who was scalping off the
top because he knew he could do a specific arbitrage move to get
money. And there are market makers who
operate that way, right? Yeah.
So there's probably a few different types of actors you're
looking at in this space right now.
There are market makers who are like arbitraging between say
Poly Market and Kelschi and their primary goal is like when
they see a disparity between those markets that it's larger
than their transaction cost, they work to bring them up to
parity because then they can make the money on the difference
there. The other type of like large
trader you're probably seeing a lot of is what I was describing
to you before we got on as the next Sam Bankman Freed, which is
like someone who's got in overinflated sense of their edge
and is willing to take large directional bets.
They're not remaining delta neutral.
They are directional one way and are hoping that between that and
the other providing liquidity activities still doing, they'll
end up ahead. And like in the case you're
talking about back in the old days, like with Predicted, which
I used to gamble on a little bit back when I was on college, back
when I was in college, excuse me, Some of the people who would
be trading that, their goal was to arbitrage it with like
Bovada, the offshore casino, because they would sometimes
have election markets and like the implied rate of return from
the odds on there would diverge from predicted.
And so you could like move one of those markets or move the
line and one of those until you were eventually back at parody.
There's some limits to how you can do that because you can't
exit a bet on an offshore casino the way you can like exit a
position on a prediction market. But like, there's a lot of those
kind of strategies. So I think they're like 2 big
institutional actors you're seeing.
There probably are some people who try to stay mostly delta
neutral and are just providing liquidity via like limit orders
to these various markets. Then I think there's a bunch of
shops that think they have an edge and are trying to do prop
trading in these markets. Right, Yeah.
And I think a, a, a distinction I want to make between like
options trading is obviously dangerous.
If you don't know, if you don't know what you're doing, you
shouldn't get involved, period. If you think it's easy, you're
wrong. But I, I do think that there's a
big, a big difference in so far as the institutions doing the
market making in the options market, they make mistakes and
some of them have blown up. But like it is generally not the
case. Whereas I think the market
makers involved in a lot of these, these prediction markets
are relatively small fries in the scheme of things.
They are not dealing with billions of dollars.
They are not trying to necessarily remain delta
neutral. And I also think it's really
easy to in many ways game these markets.
I think that's a point we should kind of sit on here for a minute
is like the possibility to gain these markets like because
that's one of I think the societal harms that can come
from prediction markets. Besides, just whether or not
these markets function as advertised, is that like once
you have people who say, for example, start integrating
polymarket markets into their like political reporting and
treat the current clearing value of that market as like a
probability a certain candidate will win, that ends up being
something where you can meaningfully affect like a
political race, right? You can suppress someone's
chances early in a campaign, like suppress their market early
in a campaign so they get fewer donations and can never mount
the same kind of campaign closer to an election date.
You might actually want to like show someone over performing
compared to polling because it might help suppress voters or
things like that. And like that gets at the
fundamental truth here, which is that like, as much as these
markets want to say a thing is a chance, like what they're
representing with these markets is a chance.
It's not really like often times they are like the better
descriptor for what they are is like the a rough measure of the
belief of the current participants in that market as
to its final outcome, right? Like it's a limited set of
people with a limited set of information.
It is not a chance or probability in any meaningful
sense, regardless of what Polly Murkid and Kel she say.
And a really important point here is that it's not about like
votes or something, right? It's not like the more people
that want to do this thing, the higher the odds are.
It is strictly monetary base so that if there's a billion
billionaire who wants to place a billion dollar bet on something,
they can and that will change the odds significantly.
And I think what I think related to that, one of the most
troubling aspects about prediction markets, and it's one
of the things that you hear their advocates like claim as a
strength is that prediction markets will tend to integrate
information that might not show up in other markets, AKA people
will insider trade. People with a real edge, real
information about what a certain outcome will be or the ability
themselves to affect that outcome will participate in
these markets and in so doing be able to extract money from every
other participant in that market.
And I think that's the other thing that people aren't fully
appreciating. And like from that you lead into
like the assassination markets and things like that.
But like, that's just one example of a market that like
someone can influence the outcome after having invested
in. It yeah, there there's also like
there is an argument that people make that we've heard a lot that
all insider trading is good. Basically, it's getting the
information out there to retail traders and everyone else faster
because you're moving the market in a very significant way.
We saw this specifically with the Venezuela invasion.
I think it was all over the news about a specific bet made where
we don't know who it was, but the user had the last name
Witkoff so who knows that I like that could be the.
User had an ENS handle with the name Witkoff in it.
It may not have been one of the world liberty founders who are
related to the Special Envoy for Peace or whatever his fucking
title is. Could very well be anyone, but
apparently somebody figured this out shortly before the invasion
happened, put a bunch of money on it, and made something like
500,000 dollars, $450,000. So we've seen this play out in
real time, and people will argue that that is actually a good
thing, right? Yes, they absolutely will.
And I think the thing like this is especially asinine when
they're talking about prediction markets on financial assets,
which exists like you can participate in a Poly market bet
as to like whether or not Bitcoin will hit 150K by a
certain date or something like that.
Those markets exist. And like one of the arguments
that's been made about them is these markets will integrate
that information. But like the process of that
integration is a process of extraction from other traders
that benefits the person with the edge, even if in some sense
that information is revealed earlier.
The process by which it's revealed is a process of pure
extraction from the other participants in the market and
it only benefits the person who is using that non public
information. It in no way like obviates or
changes any of the like historical ethical arguments
around insider trading and is actually like it ties into the
same arguments as to why insider trading was originally made
illegal. Right?
Like you are gaining an unfair benefit from information that
not all the participants have. That works as a descriptor just
as well in these prediction markets as any other, and the
asinine belief that the current clearing price of these markets
represents some kind of cosmic truth is warping the minds of
these simpletons. Well, it's not just simpletons.
I and I want to that there's so today Bloomberg put out a an
article that said Cal she Fed forecasts are as good as Wall
Street's. So the, the thinking here is
that just for anyone who's not following that headline, the the
concept is they, they looked at all the different forecasts that
people betting on Cal she have made for rate hikes or a rate
cuts on the Fed and they were about right as often or better
than Wall Street traders. I don't know if that's a
particularly good reputation because.
Well, and like, also like it's, it's, it's silly, right?
Like, of course they're going to cluster near where the analysts
are predicting. They're reading the analysts,
you know, or they're reading an AI summary of the analysts
because some of the traders in these prediction markets are
borderline illiterate. But like, the point is still,
they're taking in that same set of information.
Of course they're going to come to roughly the same consensus.
Sure. The the idea also being that you
know what, I I'm sure that in that Wall Street insiders are
better than 60% or something, right?
I like, OK, you know, I think that that's not 100% strike
rate. It's I, but yeah, I, I, I think
it's interesting that the, the real issue I'm seeing is not
just a consumer facing issue where I think a lot of consumers
just see this as the truth. They see if the odds are 75%,
the odds must be 75% in real life that this thing is going to
happen. But it is also a media problem
now. So that's been like one of the
scariest parts for me about it is how quickly so many outlets
have like integrated it into their political reporting.
How many like sports places have polymarket things running in the
Chiron? Like it is, people seem to have
including a lot of writers and journalists wholesale committed
to the idea that like, that number represents a chance,
which it doesn't really. And again, you can kind of see
this by like looking at the markets themselves, they're
highly volatile. Are you really saying that like
the chance this morning was 20 and the chance tonight is 30?
Like that, the actual chance probably hasn't changed that
much. What you're looking at is like a
consensus clearly. And like you can even kind of
see this in like, like if I flip this coin right here and I were
to open a prediction market on it, it would probably pretty
quickly end up at about $0.50 as to whether or not it's heads or
tails. But there's 100% chance this
penny is actually heads because that's where it had already
landed, right? Like there are certain things
that are already going to happen, are already committed.
And that helps you understand like probability wise, why this
isn't really like a chance or an odd or something like that.
It is a market clearing price. Yeah, and and the reason I, I
guess the reason for me that it's so troubling and I and I
know we were early with Tether and stable coins which have
proven to be. Successful beyond our wildest
imaginings. Yes, but also more important in
the like we said it was an important thing to cover.
It was fascinating and it was only growing exponentially.
We said that and that played out exactly as we said.
I think we were hoping for some sort of regulatory or law
enforcement action that never arrived.
Beautiful naivete. Yeah, yeah.
But we've been over that for several years now.
I think we've been over that for three or four years.
So I'd like the the idea that that was troubling us and we
were concerned, so we wanted to talk about it early.
I'm seeing the same thing with these prediction markets.
But my fear is different than with stable coins, which stable
coins I largely see as serving sanctioned countries and
speculators and criminals. That's the main use case for
them. People who want dollars, but
where current financial regulations or norms prevent
them from getting dollars, which we do.
For a reason, but if you want, if you think it's important that
we don't do that, OK, that's, that's perfectly fine.
So I like there I, I, I see the issues financially with stable
coins. The issue for me with prediction
markets is not that everyone is going to go broke, that everyone
is going to become a gambling addict.
I think we'll hopefully be able to stop it before that happens.
My, my issue is that these markets damage, they truly do
damage democracy. They damage free speech, they
damage what good objective reporting looks like.
And that's because we are humans and we, we seek new information
all the time and prediction markets do that.
They're constantly updated information, right.
So we are deeply attracted to that, but that doesn't make it
beneficial to society, and it certainly doesn't make it
beneficial to democratic ideals like freedom of speech or
freedom of press. Yeah, yeah.
Well, and one, I'm not convinced that one of the end results of
this won't be a huge, like gambling epidemic where a huge
number of people become addicted to gambling, right?
Like this is a really high availability and really high
prevalence of some of these things in like a way we kind of
haven't seen before or in a long time.
And like, yeah, I think it is. There's this corrosive belief
among certain technologists, and it appears more so in crypto
than in other places, that like, the age of journalism is gone.
Information is now encoded in random social media posts and in
the prediction markets that aggregate their insights, and
everything else is basically superfluous.
And I think that fundamentally misses like what makes
journalism and even punditry important, right?
It's like part of this sense making process wherein you have
to use like discernment, you have to think critically about a
variety of pieces of information and how they fit together,
whereas the prediction markets just try to distill that into a
single numerical value. There's a 67% chance Trump is
going to shit himself at inauguration or whatever, you
know, like whatever it is, it has reduced any meaning or
anything related to it and fundamentally financialized it
in a way that favors like it. It's favoring the simulacrum
over the real if you want to go like Baudrel art on it, you
know. Yeah, yeah, I, I, I guess I
don't know, part of part of the problem is that I think we often
bring up these issues and for, for us, Tether was like, OK,
well, Tether and, and these other stable coins that sprung
up, Terra, whatever. Our general solution that we
provided for these problems was like, well, law enforcement and
regulators have to do something to, it doesn't mean stomp them
out. It just means do something to
change the status quo. And I think our lesson that we
learned was, well, that's not probably going to happen.
Like if you were relying on law enforcement to do something that
you want them to do, they're probably not going to do it.
Instead, they're probably going to shoot civilians in the head
and and kidnap little kids like so.
So you if you can't rely on them in the way that you want to, I
think it's really important if we're going to discuss these
problems and these fears that we have for the future that we also
try to think about what do you do though, right?
So if we're worried about a gambling problem being
preeminent in our country and Free Press and free speech
getting eaten away by prediction markets, what do you do outside
of say, like, well, is the CFTC going to do anything?
Because that, that's very paralyzing.
I don't have a great answer for you.
Like, and it has scared me how rapidly these have been
integrated because it takes that much more like political will or
whatever to try to remove them after that.
Like we kind of talked about with Corey Frayer, regulation
tends to be a one way ratchet. It's easier to deregulate than
to regulate. And like the president's son is
invested via his venture capital fund, 1789 Capital in
Polymarket. He is an advisor to Polymarket
and I think he's also a paid, I know he's an advisor to Kelshi
and I think he's a paid advisor to Kelshi too, which is an
absurd state of affairs. Like broadly, the norm used to
be that venture capitalist wouldn't even invest in like a
competitor company in the same niche.
And now what's supposedly happening here is not only did
this venture capitalist invest in one company in the niche,
he's providing strategic advice to another company in that same
niche about how to beat presumably the company he's
invested in. Like the that kind of self
dealing suggests to me that like over the rest remaining period
of this administration, they want to make it very hard to
remove kind of people's expectations that they're going
to have access to this kind of gambling prediction market, this
kind of financial market where they can predict the price of
eggs in a year without having to go to the Chicago Mercantile
Exchange. And I don't.
I don't want to sound defeatist, but perhaps perhaps the solution
then is that these markets just need to eat themselves.
Like this just needs to be something where the liquidity
gobbles itself up. You know, like I'm sure that
prediction markets are stealing market share from, from option
trading houses. I'm sure they're, you know, from
brokers and dealers. I like that.
I'm sure they are. And I'm, I'm sure that they're
also taking market share from DraftKings and taking market
share from FanDuel. And I'm sure FanDuel is taking
market share from them. And you know what I mean?
Like at a certain point it's a snake eating its tail and I, and
we're seeing it in a lot of different industries right now.
When we recorded like 7 or 8 months ago, I had a line in, I
think it was the Molly episode, but it might have been.
And we had an addition where I was like Vlad Tenev of Robin
Hood would stab 3 regulators in the heart if it meant he could
list binary options on like a presidential election.
And that we're kind of at the point where Vlad Tenev can list
binary options on a presidential election if he so chooses,
right? Like these are going to be fully
adopted by a bunch of brokers and by a bunch of institutions.
They're going to provide very little utility.
A lot of regular people are going to become addicted, lose
huge amounts of money, destroy their relationships, and the
overall benefit to society will be sometimes someone will be
motivated to commit murder. Or or inside trade, so you find
out about something before you would have found out about it
anyway. I like I those are I, I don't
know what to say about that. As a they'll say it's a truth.
Oracle, I think is the, the basic thing you hear from, from
prediction market advocates is that it, it's an Oracle of truth
and it is doing everything to present objective truth to
everyone as quickly as possible. And I don't know if that's
actually a good thing. There's other stuff we've done
in history where you could clearly look at it and be like,
yeah, there's going to be issues with this, but at least there's
all these beneficial aspects to it, right?
This does feel a little bit like we're back in 2018 and someone
is describing, which is funny because the first ever crypto
article I wrote was about a prediction market back then.
But more broadly, like it feels like we're listening to
advocates talk and we go to them and we say, OK, is that a good
thing? What's the benefit of having
that thing you just described existing in the world whose life
is made better besides your own and the money you got from A16Z
besides your own, whose life is made better by this product?
And in so many cases, it feels like prediction markets are
still one of those things that don't have a great answer to
that question. Yeah, yeah.
And and I like you, I think that plenty of people can look at AAI
and see actual productive use use cases for for them or for
LLMS. I think a lot of people can look
at even the fact that like ETFs, I like crypto currencies are
certainly, I don't know if it's necessarily good, but are
certainly opening up a lot of new, new people to financial
markets that comp generally complicated financial markets.
I like maybe that's it's not as clearly good or bad, but for me
these feel like it's very clear that unless they're super
regulated, there are mostly bad things that they present for
society and that we're just kind of going to let that happen.
And if we are just going to let that happen, then I think that
is true that this has to just come to its its end.
However it will. I like, I wouldn't.
Be I'm going to be frank with you, I don't think it's going to
end. Right, like crypto?
Like crypto? Yeah, I think, I think this will
in many ways be more pervasive than the crypto we recognize
from our origin. I think there will be a larger
number of users for like most prediction markets than there
are people who have like a self custody Ethereum mullet, if not
yet within like five years. And like pretty soon after that
it'll pass up Bitcoin and there'll be more people
interacting with this instance of like semi regulated gambling
than there is with the like more unregulated gambling of crypto
speculation. It's gone really far, really
fast and like the situations that would you would need like a
really prominent assassination market that I think might
breakthrough to people. And like, that's why Polymarket
and Kelsey try to avoid having any like super obvious
assassination markets on their homepage, right?
Well, we've talked about this before, but I remember when they
polymarket put up a, a market for whether the Pacific
Palisades fire was going to spread to Santa Monica by some
specific date, which to me is that's basically an
assassination market. You're basically asking people
to go set this fire because if somebody put enough money on no,
then all you have to do is bet a little bit set that fire and you
just made millions of dollars, right.
So I like, I've seen them do pretty egregious stuff before
and it didn't result in anything.
So I don't necessarily think that I, like I said, I don't
think LE and regulators are worth putting any money on when
it comes to this bet. And for me, that does mean
though, this is something we talked about with Jim Chanos
too, I used to believe in like education being a great way for
possibly people to not get scammed and not fall victim to
just addiction in gambling and finance.
I don't think that's necessarily true anymore.
But I also don't think Jim's answer, which is like, well, the
way to learn is to have it happen to you and then you get,
you know, dust yourself off and don't do it again.
Is like, no, I think what happens is you, we see it people
betting all their money on some prediction market or on
DraftKings. They lose everything.
And then when they get their next paycheck, they just do it
again. Yeah, we've seen that a lot in
crypto, right? In some sense, losing it all,
like there have been traders who have described losing it all as
like the formative experience that makes a long term crypto
trader. Like if you're going to be
sticking around for more than one cycle, you need to like in
an embarrassing way, blow it and lose it all.
And then like you're you're addicted.
You're in it because you've seen other people make big money.
You yourself have like felt the sting of pain and probably
before the pain had a few brief moments where you were euphoric
as it was up and like that emotional high and low becomes
addictive. And so broadly, I think
prediction markets, along with the proliferation of gambling
and betting in general, is going to be a corrosive element in
society that is going to continue to propagate for at
least the next decade. And it's going to be like a long
time till we can develop political will to really grapple
with the consequences of that action.
I think it's going to be net negative for society and I think
our levers to affect it are pretty small.
All right. Well, I mean, I guess that's it.
I I don't know what to say. I know that today is earnings
day, so most people are probably paying attention to a whole
different set of circumstances. I know gold is like Tesla.
Missed 5 Tesla? It doesn't matter.
It's up. Tesla's up.
I know that it missed, as usual. Also, they gave $2 billion to
XAI and so they're eating their own tail.
And also Microsoft, what was it like 45%?
45% of their growth came from open AI or something.
Like that. So they're also eating their own
tail oracles, eating their own tail and all of these are the
companies that are producing all the growth for the S&P 500 and
the Dow Jones industrial average and all that.
So so it's happening everywhere I guess is the only thing I can
say that it's not even optimistic.
It's just realistic that I'm like, OK, we'll at least it
seems like liquidity is just drying up everywhere because
everything is eating itself. It is really hard not to embrace
like a financial nihilism when you look around and see some of
these things and their proliferation and the
legalization and non enforcement of every kind of fraud and scam
you can imagine. It is deeply corrosive, in my
opinion, to like the long term public's trust in finance, in
banking, in the economy as a whole, in the economic system as
a whole. All of these things are like
rotting at the core of all of these core societal and
government things, and I don't know what to do about it.
Yeah, CAS Coin by CAS Coin. That's right.