- Prediction markets are considered ineffective for hedging because they lack interest-bearing features.
- Polymarket’s July trading volume dropped to US$1.06B (AU$1.63B).
- Automated traders exploited inefficiencies and earned over US$40M (AU$61.7M) in profits.
Ethereum co-founder Vitalik Buterin has said that most prediction markets are not suitable for hedging because they do not generate returns on funds used. In a post on Farcaster, he explained that participants must give up an annual yield of around 4% that is available on stable, dollar-based assets to take part.
Buterin argued that this trade-off makes current designs unattractive for those seeking risk management tools. He added that new use cases for hedging could appear if platforms incorporated interest-bearing features, potentially increasing trading activity.
Related: Ethereum Hits New All-Time High, as Arthur Hayes Eyes $20k Pricetag
User Numbers Rise as Trading Shrinks
His comments came as Polymarket recorded July trading of US$1.06 billion (AU$1.63 billion), down from US$1.16 billion (AU$1.79 billion) in June. The platform’s active users increased from 242,340 to 286,730 during the same period, although the average trade size fell. Analysts noted that Polymarket has been expanding its range of markets beyond its early focus on politics.
Buterin’s assessment highlights broader challenges for prediction markets, including the lack of features that traditional financial tools offer, such as interest payments and diversified participation. Many participants are speculators rather than hedgers, limiting the platforms’ ability to serve risk management needs effectively.
Research also shows that automated traders have been exploiting inefficiencies. Between April 2024 and April 2025, bot-like accounts on Polymarket earned more than US$40 million (AU$61.7 million) in arbitrage profits by taking advantage of mispriced bets. The largest accounts earned millions through thousands of trades, particularly in political and sports markets.
Buterin has suggested that prediction markets could become more appealing by allowing users to retain yield while hedging, though platforms still face competition, regulation and questions about fairness as they grow.
Related: Australia Blocks Polymarket After Regulator Targets Illegal Online Betting
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