The fundamental flaws of prediction markets revealed through trivial bets

Prediction markets are rapidly growing as “engines for discovering truth” and are attracting attention from Wall Street. However, recent multiple incidents vividly demonstrate the gap between the market’s outward image and reality. A series of events on platforms like Polymarket have revealed that structural issues capable of shaking the entire market are hidden within seemingly trivial problems.

Insider Trading as Privileged Access to “Accuracy” Disguised as Information

One reason prediction markets are supported is the theory that they efficiently aggregate dispersed information and converge toward probabilistic “truth.” In the 2024 US presidential election, they demonstrated accuracy surpassing traditional polls, lending credibility to this narrative.

However, the case of Venezuelan President Maduro fundamentally challenges this theory. At that time, market prices evaluated the president’s resignation within the month as nearly impossible. Nevertheless, new accounts wagered about $30,000, and hours later, when government authorities arrested and charged Maduro, those accounts settled with profits exceeding $400,000.

This “perfect timing” suggests that market accuracy may have been driven not by the accumulation of public information but by access to insider information. The fact that the market was “too accurate” is a warning sign. There is a fundamental difference between profiting from access to information and profiting through analytical techniques. The former corrupts the market into a secret shadow trading platform, while only the latter enables a healthy market mechanism to operate.

Hidden Fundamental Governance Flaws in Trivial Issues

In 2025, a seemingly trivial bet appeared on Polymarket: “Will President Zelensky of Ukraine wear a suit by July?” This bet, which gathered hundreds of millions of dollars in trading volume, eventually developed into a serious governance crisis.

When President Zelensky appeared in public wearing a black designer jacket and trousers, media and fashion experts judged it as a suit. However, the oracle (Manhattan Machine) voted “No” and refused to determine the outcome.

This decision was rooted in a fundamental flaw in the incentive mechanism. A small number of large token holders had enough voting power to enforce outcomes aligned with their interests. In a system where the cost of lying is lower than the reward gained from lying, corruption is inevitable. This is not a flaw in decentralization but a failure of financial design that could not properly structure human incentives.

A seemingly minor issue exposed a serious governance flaw capable of undermining overall market trust.

Shift of Focus Toward Growth and Regulation

By 2025, prediction markets are rapidly shifting from peripheral entities to mainstream, with Kalshi processing about $24 billion in trading volume and Polymarket receiving a buyout proposal of up to $2 billion from NYSE shareholders. As Wall Street considers full-scale entry, regulatory authorities’ interest is also increasing.

Members of Congress, including Rep. Rich Trumka, are pushing bills to ban insider trading. Notably, the regulatory debate is shifting from concerns about “market inaccuracy” to concerns about “being too accurate.” If markets incorporate leaks of classified information or military operations to achieve high precision, they cease to be information markets for citizens and instead become trading platforms based on breaches of confidentiality obligations.

Breaking Free from the Illusion of the “Truth Machine”

Supporters of prediction markets tend to interpret these issues as “growth pains” or temporary disruptions. However, the reality is different. When three factors—financial incentives, ambiguous outcome determination criteria, and unresolved governance structures—combine, corruption and manipulation become inevitable.

The core problem lies in the image of prediction markets as “engines for discovering truth.” As long as this image persists, trivial disputes over judgments can be perceived as existential crises. However, if platforms are recognized merely as “high-risk, high-stakes financial products,” disputes can be addressed as normal operational issues rather than philosophical crises.

There is no need to deny prediction markets. In uncertain situations, markets are one honest way to express beliefs and can even detect early signs of social unrest faster than polls. Nonetheless, they should not be overly idealized beyond reality. They should function honestly as “financial products betting on future events,” not as “epistemological engines.”

Only then can more transparent regulatory frameworks and ethical designs be realized, creating mechanisms to protect the entire market from seemingly trivial issues.