Vitalik Buterin: Hedging on Prediction Markets Could ‘Replace Fiat Currency’

Ethereum co-founder Vitalik Buterin has argued that hedging on prediction markets could provide the same kind of price stability as stablecoins, potentially rendering fiat currency unnecessary.

In a long tweet, Buterin offered his views on how to make prediction markets more useful, with the Russian-Canadian programmer arguing that, while achieving a “high level” of success, they are currently producing an increasing quantity of “corposlop.”

He wrote, “[Prediction markets] seem to be over-converging to an unhealthy product market fit: embracing short-term cryptocurrency price bets, sports betting, and other similar things that have dopamine value but not any kind of long-term fulfillment or societal information value.”

“TLDR: we’re gonna replace fiat currency”

Buterin’s solution to this perceived state of affairs is to focus on what is currently a more peripheral use case for prediction markets.

“My current view is that we should try harder to push them into a totally different use case: hedging, in a very generalized sense (TLDR: we’re gonna replace fiat currency),” he posted.

In order to explain what he means by this, Buterin uses the example of using a prediction market to bet for a scenario that would actually impose a loss on the bettor, if it were true.

The example he gives is of a shareholder in a biotech company betting for the election victory of a political party that would actually be bad for that same company.

By doing this, the bettor wins something in either scenario, mitigating any losses.

Buterin then moves on to explain how such hedging might substitute for the use of stablecoins, which he points out are used by people who “want price stability,” but which are not truly decentralized because they’re pegged to the U.S. dollar (or some other fiat currency).

“There has been lots of thinking about making an “ideal stablecoin” that is based on some decentralized global price index,” he said, “but what if the real solution is to go a step further, and get rid of the concept of currency altogether?”

Buterin’s idea is to create prediction markets “on all major categories of goods and services that people buy,” and for users to buy positions in such markets according to their everyday spending.

He wrote, “Each user (individual or business) has a local LLM that understands that user’s expenses, and offers the user a personalized basket of prediction market shares, representing ‘N days of that user’s expected future expenses’.”

By taking such an approach, Buterin suggests people will “not need fiat currency at all,” since they will be able to hold personalized prediction market shares whenever they want price stability.

Under this scheme, such prediction market shares will pay out in an asset people want to hold, such as Ethereum, wrapped stocks or interest-bearing fiat (but not non-interest-bearing fiat).

He concluded, “If we can make it work, it’s much more sustainable than the status quo, because both sides of the equation are likely to be long-term happy with the product that they are buying, and very large volumes of sophisticated capital will be willing to participate.”

Becoming information infrastructure

While Buterin did not provide further details on how this possible system might work, figures working within the sector are open to such use cases.

“Prediction markets shouldn’t exist to farm opinions or fulfill short-term dopamine needs of the ‘gamble everything’ crowd,” said Loxley Fernandes, the CEO of prediction market Myriad, owned by Decrypt’s parent company Dastan.

Fernandes agrees that the industry should be positioning markets to hedge reality, and that failure to do so could invite risks.

He added, “When prediction markets become tools for risk reduction, coordination, and economic stability, they stop being entertainment and start becoming information infrastructure.”