Prediction markets sound crazy. People “bet” on what the future will be, and the reported results end up accurate predicting the future.

Truthcoin's Paul Sztorc, a decentralized prediction market pioneer, recently joined Epicenter Bitcoin to chat about how the future might look if these markets get off the ground.

But first, he explained how prediction markets, such as Truthcoin, work. As Sztorc put it, “a prediction market is a market for buying and selling predictions just like you can buy and sell anything you want—orange juice or milk.” Users put their money where their mouth is; they will only win money if they correctly guess a future event. It's often compared to betting, but more informed than that.

There are many advantages of tapping the so-called wisdom of crowds. “You get all the signal, but you get almost none of the noise.” he said. “These markets can very quickly extract all of the important information from a crowd.” And there's implicit agreement among everyone who doesn't trade at the current market price. If they agree, they don't trade. If they have some insider information or expertise that the rest of the market doesn't, they would stand to benefit from changing the course of the market.

“You're making a meta-knowledge contribution,” explained Sztorc. “You're saying this is wrong and you're saying I know why every other person is incorrect.”

These markets result in accurate forecasting. Sztorc:

“They're much more accurate than anything that's ever been devised or tested. They're these amazing things. They'll get every single academy award. They'll get every single state's electoral votes.”

While past prediction markets, such as Intrade, shuttered due to government interference, Truthcoin is an uncensorable peer-to-peer prediction market that uses a decentralized oracle system. Past prediction markets relied on a central entity to report the outcomes of events (Did Hilary Clinton win the presidential election?), but Truthcoin relies on a soup of volunteers to determine who won. The system incentivizes these oracles to be honest.

Augur and Gnosis are a couple of other decentralized prediction markets, though they use Ethereum rather than Bitcoin.

How election night will look

Prediction markets will change governance, according to Sztorc. Consider election night. Rather than citizens investing sweat and tears researching candidates—or relying on a politician's promises—they can look up a candidates positions via smartphone as they're standing in line to vote. Prediction market projections will give citizens a more accurate idea of how the world will look if a given politician is elected.

“It's yearning for a world where we don't even have to listen to these campaign promises,” he said. Governments might adopt better policies and even elect third party candidates as a result. Plus, right now, there’s a “friction” where some policy stances are too difficult for people to understand. But prediction markets give people better information about how things will look down the road if certain policies are adopted.

Sztorc compared prediction markets to the far-reaching effects of the printing press, and called it the “brain” of the Internet, Sztorc said:

“Internet is the nervous system for society. But the nervous system was doing very boring things—you know, sending email—before. Email's great. Everyone loves email, including me. But that's not what the nervous system is about. It does those things, but everything that has a nervous system has a brain that takes all these signals and interprets them as information and reacts—causes the entire system, the entire organism, to react in a very coordinated way. That's the real purpose of the Internet—it's not so that two people can email each other. It's so that we can achieve this concept of every single person having all these diverse values and thoughts and beliefs and knowledge and experiences and having them all pooled up and then having it all broadcast back out as something simple that, ok, here's what we should all do.”

About Epicenter Bitcoin

Epicenter Bitcoin is a podcast about the technologies, projects & startups driving decentralization and the global cryptocurrency revolution. Every week hosts Brian Fabian Crain and Sebastien Couture talk to some of the most influential people in the cryptocurrency space about their projects and get their perspectives on recent events. Their guests, who range from entrepreneurs to academics, to industry experts, join the conversation from different locations around the globe, which gives EB a truly international scope.

You can watch live Google Hangouts every week on YouTube and listen to the audio version on SoundCloud and iTunes.