5 min read
Imagine placing a bet on whether a political candidate wins an election, not in USDC or dollars, but in Bitcoin—and when the bet resolves, you don’t lose your exposure to Bitcoin’s value.
That’s the provocative case made in “Bootstrapping Liquidity in BTC-Denominated Prediction Markets.” The paper suggests that for many users, BTC settlement isn’t just a niche preference—it could actually deliver superior economics.
The author, computer scientist and consultant Fedor Shabashev, begins with a critique of the status quo. Most on-chain prediction markets, like Polymarket and Myriad, denominate in stablecoins. This avoids volatility but forces Bitcoin holders to swap their BTC for something that doesn’t appreciate. (Disclaimer: Myriad is a product of DASTAN, Decrypt's parent company.)
Over time, that means missing out on value if BTC rises. There’s also what the paper calls an “opportunity cost” relative to what stablecoins offer (often very little yield) and what fiat interest rates might give.
“While denominating prediction markets in stablecoins such as USDC avoids exposure to Bitcoin volatility, it forces Bitcoin holders to convert and suffer opportunity costs relative to BTC appreciation,” Shabashev wrote. “Treating BTC as a deflationary settlement asset analogous to gold under the classical gold standard offers users exposure to long-term appreciation instead of mere fiat stability.”
Shabashev explores three ways to bootstrap liquidity in new BTC-based markets: cross-market making (hedging and mirroring stablecoin markets), DeFi redirection of trades (leveraging existing stablecoin liquidity via conversions or synthetic exposure), and automated market makers (AMMs) native to BTC-settled markets. For each, he dives into risk profiles (exchange-rate swings, slippage, permanent loss, capital demands) and how they affect users and liquidity providers.
The conclusion: BTC-settled prediction markets are feasible and even attractive under many circumstances. But they require careful design trade-offs, especially around how you provide liquidity without exposing users or makers to outsized risk.
To illuminate why this isn’t just abstract, here are several cases where BTC settlement could deliver a noticeable edge:
Long-dated political events: Suppose there’s a market on who wins the U.S. presidency in 2028, but it’s 2025 now. For someone holding Bitcoin, staking BTC rather than converting to a stablecoin allows them to participate while retaining exposure. If Bitcoin rises substantially between now and the outcome, then the BTC-settled bet offers more upside (or conversely, more risk).
Crypto-native communities: For users who have their portfolio in BTC or believe in crypto as value storage, stablecoin payouts feel like giving up part of the thesis. Offering BTC settlement aligns incentives. These users may be more trusting (or more willing to accept risk) for BTC rewards.
Markets in places with unstable fiat or regulatory concerns over stablecoins: In jurisdictions where fiat inflation is high or stablecoins are regulated tightly, BTC-settled markets might offer a more trusted settlement asset, assuming legal/regulatory clarity.
Events with small payoff windows or volatile periods: For example, markets around macroeconomic indicators or major policy decisions where settlement is months or more away. Volatility matters more in those cases; BTC denomination becomes more relevant.
Bitcoin settlement carries real risk. If Bitcoin crashes during the bet period, then someone holding BTC-denominated shares might see a steep value drop in fiat terms. Liquidity providers suffer more in volatile environments, especially under AMM designs with “permanent loss.” Hedging exchange rate risk is nontrivial. And legal or tax treatment may be more complicated where BTC is concerned (capital gain, asset classification, etc).
User interface, transparency, and clear risk disclosures become critical. Bets that read straightforward when denominated in stablecoins can look unpredictable once Bitcoin’s volatility gets baked in.
Likewise, while "Bootstrapping Liquidity in BTC-Denominated Prediction Markets" lays out a thoughtful framework, the analysis is fundamentally theoretical. There are no real‐world, BTC-settled prediction markets operating at scale yet, thus no case studies with significant trade volumes or long‐term user behavior data.
This means we don’t yet see how practical implementation issues—interface delays, regulatory friction, latency, user misunderstanding—will shape outcomes. The modeled risks are real, but how they match up with messy, unpredictable human behavior remains open.
The paper also assumes favorable conditions that may be hard to replicate. Its prediction that cross-market making yields relatively low risk relies on having professional market makers or platform subsidies in place. If those are absent, then the risk for regular users or smaller markets becomes substantially higher.
Volatility and exchange rate risk, while discussed, may be under-quantified—especially in moments of stress when hedging instruments may be thin or expensive. Similarly, capital-inefficiency looks manageable in high‐volume scenarios, but in thin, early markets, slippage and “permanent loss” (in AMMs) could render a BTC‐settled contract unattractive.
Finally, user experience and regulatory/tax implications are only cursorily addressed. A contract paying out in BTC may lead to confusion or unexpected liability (for example, tax events or asset classification), especially for users used to thinking in fiat terms, which could hamper adoption or expose platforms to risk.
The "Bootstrapping Liquidity" paper makes a compelling case that for many use cases, settling prediction market contracts in Bitcoin could outperform alternatives—especially stablecoins—by preserving BTC exposure, aligning incentives, and potentially attracting more crypto-native liquidity.
However, it isn’t a panacea. It demands smart market design, aligned incentives, and risk mitigation. But as the crypto market matures, BTC-denominated prediction markets might not just be possible—they may turn out to be smarter.
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