Envision placing a wager on the outcome of a political election, not using USDC or traditional currency, but rather Bitcoin. When the bet concludes, you retain your exposure to Bitcoin’s value.
This intriguing proposition is explored in the paper titled “Bootstrapping Liquidity in BTC-Denominated Prediction Markets.” The author argues that for numerous users, settling in BTC is not merely a niche choice—it could actually provide better economic benefits.
Fedor Shabashev, a computer scientist and consultant, initiates his discussion with an analysis of current practices. Most blockchain-based prediction markets like Polymarket and Myriad use stablecoins for transactions. While this approach mitigates volatility risks, it compels Bitcoin holders to exchange their assets for currencies that do not appreciate over time. (Note: Myriad is developed by DASTAN, which owns Decrypt.)
This conversion leads to potential losses if Bitcoin’s value increases over time. Additionally, the paper highlights an “opportunity cost” when comparing stablecoins—often yielding minimal returns—to what fiat interest rates might offer.
“While using stablecoins such as USDC helps avoid exposure to Bitcoin’s volatility,” Shabashev notes, “it forces those holding BTC to convert their assets and incur opportunity costs relative to any appreciation of BTC.” He suggests treating BTC as a deflationary settlement asset akin to gold under classical standards provides users with long-term growth opportunities instead of just stability offered by fiat currencies.
The author examines three strategies for enhancing liquidity within new markets based on BTC: cross-market making (hedging against stablecoin markets), DeFi trade redirection (utilizing existing liquidity from stablecoins through conversions or synthetic means), and automated market makers (AMMs) specifically designed for these markets. He delves into risk factors associated with each method—such as exchange rate fluctuations and slippage—and how they impact both users and liquidity providers.
The takeaway? Prediction markets settled in BTC are practical and can be appealing under various conditions; however, they necessitate careful design considerations regarding how liquidity is provided without exposing participants or creators to excessive risks.
When Settling in Bitcoin Could Be Beneficial
To illustrate why this concept matters beyond theory, consider several scenarios where settling bets in BTC could offer significant advantages:
Long-term Political Events: Imagine there’s speculation about who will win the U.S. presidency in 2028 while it’s currently 2025. For someone holding Bitcoins now opting instead of converting them into stablecoins allows them continued participation while maintaining their investment exposure; should Bitcoin’s price surge before results are announced then betting settled inBTC would yield greater rewards—or conversely present higher risks.
Cryto-centric Communities: For individuals whose investments are primarily held as Bitcoins or who view cryptocurrency as reliable storage of value may perceive payouts made via stablecoin less favorable since it feels like compromising part of their core belief system; thus offering settlements directly throughBTC aligns interests more closely among these groups encouraging trust towards accepting such rewards despite inherent risks involved therein!
Markets Operating Under Unstable Fiat Conditions Or Regulatory Scrutiny Over Stable Coins : In regions facing high inflation rates affecting local currency values coupled alongside stringent regulations imposed upon usage/availability surrounding traditional forms – utilizing bitcoin based settlements might prove advantageous given its established reputation assuming legal clarity exists surrounding its implementation!
Situations With Brief Payoff Windows Or High Volatility Periods : Consider events tied closely around macroeconomic indicators where outcomes remain uncertain extending several months ahead before resolution occurs – here volatility plays an even larger role making btc denomination particularly relevant!
Cautions To Consider
The utilization Of bitcoin carries inherent risk factors – should prices plummet during active betting periods individuals holding shares denominated solely within btc may witness steep declines translating negatively into fiat terms! Furthermore providers face increased challenges amidst volatile environments especially involving AMM designs prone towards ‘permanent loss’ scenarios arising unexpectedly! Hedging against fluctuating exchange rates proves complex whilst legal/tax implications become murky depending upon jurisdictional variances encountered across borders resulting potentially unfavorable outcomes down-the-line !
User experience must prioritize transparency alongside clear disclosures outlining associated risks involved throughout process flows leading up until conclusion point arrives whereby bets originally appearing straightforward via standard methods suddenly appear unpredictable once factoring-in bitcoin’s notorious price swings occurring regularly! </P
Additionally although “Bootstrapping Liquidity In Btc Denominated Prediction Markets” presents thoughtful frameworks analyses remain fundamentally theoretical lacking real-world examples showcasing successful implementations operating at scale thereby limiting insights derived from substantial trading volumes accrued over extended periods capturing user behavior data accurately enough reflecting actual experiences encountered out there ! </P
This absence raises questions concerning practical issues faced including interface delays regulatory hurdles latency misunderstandings amongst users shaping overall outcomes achieved post-implementation phase itself ! Risks modeled herein do exist yet aligning them accordingly with unpredictable human behaviors remains unresolved territory requiring further exploration going forward ahead … !! </P
The assumptions laid forth presuppose favorable conditions difficult replicating consistently across diverse landscapes impacting effectiveness levels attained therein especially when considering cross-market making yielding lower risk expectations contingent upon presence professional market makers/platform subsidies required ensuring smooth operation flow uninterruptedly maintained throughout entire lifecycle journey undertaken hereafter . Should either factor fail then regular user engagement diminishes significantly raising stakes considerably higher than anticipated beforehand ultimately leading undesirable consequences arising swiftly thereafter!! !! !!! !! !! !! !!! !!!! !!!!!!!! !!!!!!!!!! !!!! !!!!!! !!!!!!!!!!!!!!!! !!! !!!!! !!!! !!! !!! !!!! ………. ……. ……. ………….. ……………
Volatility along exchange rate uncertainties discussed previously may also warrant deeper quantification efforts particularly during moments heightened stress levels witnessed across broader financial systems wherein hedging instruments become scarce costly prohibitive altogether rendering contracts unattractive prospects ultimately falling short expectations envisioned initially prior commencement activities taking place earlier mentioned above …
Finally addressing user experience regulatory tax ramifications only cursorily acknowledged warrants closer scrutiny moving forward since contracts paying out exclusively utilizing bitcoins could generate confusion unexpected liabilities arise e.g., taxation events classification issues complicating adoption processes potentially exposing platforms unnecessary liabilities resulting adverse effects realized down road ahead …
Conclusion
The “Bootstrapping Liquidity” document presents compelling arguments suggesting many use cases indicate settling prediction market agreements via bitcoins stands poised outperform alternatives notably those relying solely upon conventional means preserving valuable exposures aligning incentives attracting crypto-native liquidity sources effectively increasing overall participation metrics observed historically speaking too…
Nevertheless it isn’t without challenges requiring astute designs ensuring proper alignment incentives mitigating identified risks proactively managing all aspects thoroughly throughout execution phases necessary achieving desired results successfully achieved together collaboratively shared goals set forth previously agreed-upon mutually beneficial arrangements established collectively beforehand too…