The shocking reversal of the US election from the Ethereum prediction market

Note: The original text comes from James Beck of ConsenSys. The translator has updated the data involved in the article to reflect some changes in the current market. As of now, the results of prediction markets including Augur, Polymarket, Omen, etc. all show that Trump has a high probability of winning the 2020 US presidential election.

James Surowiecki’s book The Wisdom of Crowds opens with a story about the British scientist Francis Galton, who on a brisk fall day in 1906 went to a fun fair where the crowd could guess the weight of an ox. Galton thought the crowd’s average estimate would be far off from the actual weight of the ox, and he thought the farmers and butchers would be more accurate. But the results left a deep impression on him: under the right circumstances, the crowd is often smarter than the smartest person in it. In fact, the average of all 787 guesses from the crowd was 1,197 pounds, while the actual weight of the ox was 1,198 pounds. In other words, the crowd’s guess was nearly perfect.

What makes the average guess of a county fair crowd so accurate in guessing the weight of an ox? According to Surowiecki, there are four characteristics of an intelligent crowd:

1. Diversity of opinion: Everyone deserves some private information, even if it’s just a quirky interpretation of known facts;

2. Independence: People’s opinions are not determined by the opinions of those around them;

3. Decentralization: people are able to specialize and leverage local knowledge;

4. Aggregation: There are some mechanisms to transform private judgments into collective decisions;

Surowiecki's idea was based on a statistical principle: if you ask a sufficiently large, diverse, and independent group of people to make a prediction, or estimate a probability, and then average those estimates, the errors that each of them made in arriving at their answer will automatically cancel out. Surowiecki speculated:

“Everyone’s guess has two components – information and error, and when you subtract the error, you get the information.”

Ethereum’s own characteristics have laid the foundation for stimulating public wisdom. One of the first applications proposed by Vitalik Buterin in the Ethereum white paper was the prediction market, and Augur and Gnosis are the two most well-known prediction market applications.

Nearly five years after Ethereum’s launch, how are these prediction market applications performing?

Can prediction markets be more accurate than polls?

First, it is important to point out that prediction markets are not a recent invention, in the long history of political betting markets, Paul Rhode and Koleman Strumpf describe Wall Street betting markets during the Civil War, and these betting markets were wrong only once in 15 presidential elections between 1884 and 1940. According to a study by the University of Iowa, the Iowa Election Market (IEM) outperformed major national polls.

While prediction markets work well, they don’t always. PredictIt, another popular election market, didn’t predict Brexit or Trump’s victory in 2016. On the eve of the 2016 election, prediction market aggregator PredictWise gave Hillary Clinton an 89% chance of winning the presidency, while Republican Trump had just an 11% chance of winning.

Obviously, the wisdom of the masses is not necessarily accurate.

Today, global interest in predicting the US election has reached a record level. On the Ethereum prediction platform, the prediction transaction volume on the Augur platform alone exceeded US$6.8 million.

So, do these Ethereum-based prediction markets meet the conditions of the intelligent crowd described by Surowiecki, namely diversity of opinion, independence, decentralization, and aggregation?

Performance of the three major Ethereum prediction markets

I tried out three new Ethereum-based prediction markets — Polymarket, Omen, and Catnip — to see how smart they ultimately were.

(Disclaimer: Different jurisdictions have different laws regarding prediction markets, so you will need to do further research to ensure that participating in the market is legal.)

1. Omen

Market: "Will Biden win the 2020 US presidential election?"

Yes: 44.52% No: 55.48%

The first prediction market I checked out was the Omen market by Gnosis, which had a very intuitive user interface and only required one transaction approval after connecting to a MetaMask wallet, which cost about $2.

If a user thinks Biden will win, he can choose the "Yes" option, otherwise he can choose "No".

The “Trading History” shows the total voting changes over the life of the market. On August 23, there was a notable shift with 59% predicting Biden would lose, but by September 8, the collective result had shifted back to Biden, which then showed a 64% chance of winning. Since then, the market has remained somewhat stable, with 60% predicting Biden will win and 40% predicting Trump will win. Today, the situation has suddenly changed, and the market is currently predicting that Trump has a greater chance of winning.

2. Polymarket

Markets: "Will Trump win the 2020 US presidential election?"

Yes: $0.7 No: $0.3

Polymarket’s user interface is also very intuitive, and it walks users through a tutorial that shows how to make predictions. However, I have one complaint about this app: to join a prediction market, users must purchase or deposit USDC in Polymarket, rather than simply connecting to your MetaMask wallet.

Like the Omen prediction market, Polymarket's prediction results also underwent a 180-degree turn today. Its current prediction result is: Trump has a greater chance of winning.

3. Catnip

Markets: "Will Trump win the 2020 US presidential election?"

Yes: $0.691 No: $0.309

Catnip is a prediction market built on Augur and Balancer that promises ultra-low fees and is 100% non-custodial and decentralized. The only market currently available on the app is "Will Trump win the 2020 US presidential election?" It should be noted that this market will not be settled until after January 22.

You can easily access the app through your MetaMask wallet and select the outcome you want to support, either yTrump or nTrump, which stands for "yes" and "no" respectively. Unlike Omen and Polymarket, these yTrump or nTrump tokens will be sent directly to your MetaMask wallet.

Similarly, the Catnip market's current forecast is that Trump has a greater chance of winning.

Are the predictions of the Ethereum prediction market reliable?

Of the four considerations for gathering useful crowd wisdom, Ethereum prediction markets have an advantage in aggregating decentralized inputs and reliably determining winning and losing bets.

What’s particularly interesting about the Iowa Election Market (IEM) we mentioned earlier is that its typical sample size is no more than a few thousand traders and does not reflect the makeup of the entire electorate, and most traders are white males from Iowa (apparently, Ethereum prediction markets also have a disproportionate number of male users). However, market participants are not necessarily predicting their own behavior, but what they think American voters will do - which has been shown to be at least as accurate as polls.

While some Ethereum prediction markets have higher liquidity than IEM, they lack the sample size to be comparable to BetFair, and clearly there are questions about whether these predictions are accurate enough.

But one thing is clear: Ethereum-based prediction markets represent a simple and quick way to transform opinions into a single collective judgment, and it may improve the way we understand outcomes.