The "Difference Between Truth and Fact" in Prediction Markets — The Fundamental Contradiction Indicated by High Accuracy

Prediction markets continue to expand rapidly. Platforms like Polymarket have demonstrated accuracy that surpasses traditional analytical methods, leading to their praise as “truth discovery engines with the ability to foresee the future.” However, a strict distinction between truth and fact reveals a fundamental error in this assessment. A recent series of events suggests that the high accuracy of these markets actually indicates systemic risks.

Hidden Structural Problems Behind Success: Information Asymmetry and Financial Incentives

The basic mechanism of prediction markets appears straightforward. Participants bet on the probabilities of future events, and their collective judgments shape the market’s forecast. In theory, when many people wager based on their beliefs, noise cancels out, revealing probabilities close to the truth—this logic is compelling.

However, after the 2024 US presidential election, the market showed astonishing accuracy. Prediction markets like Polymarket predicted results with greater precision than mainstream media, analysts, or opinion polls. This success created a narrative that the market was not just a forecasting tool but had access to the very truth itself.

Yet, an event that occurred a month later revealed this story to be a dangerous illusion. A new account appeared on Polymarket, betting over $30,000 on a very low-probability event: that Venezuelan President Maduro would resign by the end of the month. At the time, the market’s valuation considered this event highly unlikely, yet a few hours later, police arrested Maduro and charged him in New York. The account settled with over $400,000 in profit. The market was correct. And that is the problem.

What the Maduro Incident and Zelensky Lawsuit Unveiled

The fact that the market was accurate in this case is, at first glance, paradoxical. But where that accuracy comes from is crucial.

What if the market’s accuracy results not from analyzing public information but from access to insider information? In other words, the “difference between truth and fact” is not that the market reflects actual truth (what actually happened), but that the actions of those with privileged information shape subsequent market movements. In this case, the “accuracy” indicated by the market is not honest information aggregation but a profit mechanism exploiting information asymmetry.

A more serious issue was revealed by the Zelensky lawsuit. In 2025, a market appeared on Polymarket asking, “Will Ukrainian President Zelensky wear a suit by July?” Initially seeming like a joke bet, it gathered several billion dollars in trading volume. When Zelensky wore a jacket and trousers from a famous designer, media and fashion experts called it a suit.

However, the platform’s oracle system (result verification system) voted “No.” A small number of large token holders had enough voting power to push the outcome in their favor. The terrifying aspect of this mechanism is that the cost of lying is lower than the payout. The system functioned exactly as designed, with financial incentives causing a divergence from truth and fact.

From “The Machine of Truth” to “Gambling Financial Products”—The Need for Honest Self-Assessment

It is a mistake to see these incidents merely as temporary problems in a growth process. Instead, they reveal an inherent, unavoidable contradiction embedded in the prediction market system.

As long as prediction markets are heavily driven by financial incentives, ignoring the “difference between truth and fact” is inevitable. The larger the financial reward, the stronger the incentive for those with informational advantage. If the oracle (result verification system) can be manipulated by a few dominant token holders, governance flaws will persist.

The root issue is that prediction markets present themselves as “noble engines for discovering truth.” Participants and regulators have been led to believe this illusion. But truth and fact are different. Truth is a complex, multifaceted reality; facts are the individual events or states that constitute that reality. Prediction markets are only betting on the latter—“what actually happened”—and are not truth discoverers.

If markets acknowledge that they are high-risk, high-stakes financial products—essentially gambling activities—then the approach changes. More precise regulation becomes possible, and more ethical designs can be pursued.

Where Should Regulation Focus Be?

Trading volume in prediction markets has surged in recent years. Platforms like Kalshi handle hundreds of billions of dollars annually, and Polymarket is valued at about $9 billion. Wall Street is beginning to recognize these markets as comparable to traditional exchanges, exploring strategic investments and acquisitions.

Regulators’ interest is also rapidly increasing. Some members of Congress have proposed bills banning insider trading, concerned that markets operate based on privileged information. However, the focus of regulation remains vague.

Ideally, regulation should not aim to address “market inaccuracy” but rather the “misleading accuracy.” Is the market operating solely on public information, or is it driven by internal information? Is the oracle governance transparent and decentralized, or open to manipulation by a few? The answers to these questions should determine the regulatory framework.

Conclusion: Confronting the Difference Between Truth and Fact

There is no need to oppose prediction markets outright. They are honest mechanisms for expressing beliefs amid uncertainty and can even detect social anxieties and shifts earlier than opinion polls.

However, they should not be called “truth discovery machines.” Prediction markets are financial products related to future events, and as long as they ignore the divergence between truth and fact, their high accuracy signals a more profound problem.

By honestly recognizing the difference between truth and fact and accepting the true nature of prediction markets, more appropriate regulation and design can be achieved. This is the only way to ensure their continued development.