Vitalik Buterin Warns Prediction Markets Face Collapse Without Fix

Ethereum co-founder Vitalik Buterin is calling for a fundamental restructuring of decentralized prediction markets. He argues that the sector’s current reliance on speculative gambling threatens its long-term viability.

This view comes as prediction marketplaces like Polymarket have enjoyed significant success over the past year.

Buterin Calls for Structural Overhaul of Prediction Markets

On February 14, Buterin contended that while platforms like Polymarket have achieved significant volume and mainstream attention, they are currently suffering from an “unhealthy market fit.”

“[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,” Buterin argued.

He warned that the sector is dangerously over-reliant on “naive traders,” defined as speculators seeking short-term payouts.

This speculative behavior contrasts sharply with the markets’ intended purpose: facilitating information discovery and risk management.

Buterin categorized current market participants into two distinct groups: “smart traders” and “money losers.” Currently, the latter category is dominated by retail gamblers.

He argued that if prediction markets continue to prioritize revenue extraction from these users over societal utility, they risk collapsing during bear markets when speculative fervor cools.

“There is nothing fundamentally morally wrong with taking money from people with dumb opinions. But there still is something fundamentally “cursed” about relying on this too much. It gives the platform the incentive to seek out traders with dumb opinions, and create a public brand and community that encourages dumb opinions to get more people to come in,” the Ethereum co-founder contended.

To secure a sustainable future, Buterin proposed that these platforms transition to “hedging”—effectively serving as insurance mechanisms rather than betting platforms.

In this model, a user would not bet on an outcome to make a profit, but rather to offset real-world risks, such as a business owner betting on a policy change that could negatively impact their supply chain.

AI-Driven Hedge System to Replace Fiat

The Ethereum co-founder’s recommendations extended into radical economic territory, suggesting that prediction markets could eventually render fiat-pegged stablecoins obsolete.

Buterin proposed creating granular price indices covering major categories of global goods and services.

Under this theoretical framework, users would utilize local Large Language Models (LLMs) to analyze their personal spending habits. The AI would then construct a personalized “basket” of asset shares that mirrors the user’s specific cost of living.

By holding these prediction market shares rather than U.S. dollar-pegged assets such as USDC or USDT, users could theoretically maintain their purchasing power against inflation without relying on traditional banking infrastructure.

“We do not need fiat currency at all! People can hold stocks, ETH, or whatever else to grow wealth, and personalized prediction market shares when they want stability,” he wrote.

Buterin acknowledged that transitioning from the current “info buying” phase to an advanced hedging economy would require new infrastructure.

However, he maintained that replacing fiat currency with diversified asset baskets remains the technology’s ultimate evolution.