Prediction markets have exploded into a multi-billion dollar industry, but recent insider trading scandals and high-profile CFTC enforcement actions have made one thing clear. Regulatory overhauls are inevitable. Yet the coming crackdown has also sparked a fierce debate on Wall Street as well as in Silicon Valley. So can these platforms actually comply with coming rules without stripping away the privacy as well as permissionless nature that made them popular? Joining us this morning to weigh in is Eli Ben-Sesson, who is CEO of Starkware and author of Zero Knowledge, Infinite Trust. Eli, good morning. Thank you so much for joining us. Well, prediction markets have gone mainstream, but there have been recent scandals over insider trading as well as manipulation, and this has triggered a fierce regulatory backlash. So what do you think the industry's fear is regarding incoming regulation? And what do you think needs to happen when it comes to compliance without destroying user privacy?
Well, the big fear is that the baby is spilled with the water or that you come to, you know, with a heavy hand of regulation and you actually ruin things for the average users. Because you have to understand that prediction markets are this amazing innovation that allows people to use their knowledge, their expertise in order to monetize that in new ways. And that is a wonderful innovation brought by this technology called blockchain. Regulation is necessary, but we also have to worry or be careful with it so that you don't have over-surveillance, over-transparency, and that users, knowledgeable users and legitimate users, are actually able to profit from their knowledge. That's the fear of the industry.
Yeah, absolutely. So I do want to delve into this. Regulators are demanding strict know-your-customer rules, while traders out there may be considering loss of anonymity against potential data leaks. So for the layperson out there, can you explain how zero-knowledge cryptography allows a user to prove that they are indeed legitimate? And when it comes to verified traders, How can they actually reveal their identity, personal identity, or wallet history to the platform while maintaining this privacy?
Zero-knowledge proofs are a mathematical innovation from about 40 years ago that allows anyone to act reliably and act with integrity without revealing all of their information. I'll give an example. Today, if I want to prove that I'm over 21, at a bar, I need to show some ID that will reveal where I live and may compromise my security. With zero-knowledge proofs, I can prove with the same reliability that I am at the right age for drinking without revealing any other information. And in a similar way, when it comes to KYC and legitimate users, I can prove that I have been KYC, that I, you know, have the authority to act, that I'm over 18 or whatever is needed, without revealing to third parties all of my information and all of my history. And that is thanks to mathematical innovations, which are, you know, today available.
Yeah, so I do want to get into prediction markets here. In your book, Zero Knowledge, Infinite Trust, you detail how cryptographic proofs do establish integrity without exposing that raw data. So what does a privacy-preserving, ZK-compliant prediction market actually look like in practice?
You know, first of all, I'm going to share something that sounds a little bit impossible, but we're actually, you know, building a prototype of such a thing. So blockchains are completely transparent. And if I do anything like make a transaction on PolyMarket, you're able to see that transaction using a browser. At the same time, we are able, using zero-knowledge technology, we're able to provide privacy to legitimate users while also allowing legislators and regulators compliance and the ability to view, in certain cases, with legal cause, the actions done privately. So all of this is possible thanks to this marvelous zero-knowledge math. And it's, you know, going to come live in products, not just in, you know, books and articles.
Yes, I do want to get your perspective when it comes to the bad actors out there. Now, enforcement agencies are targeting market manipulation on high stakes events. So can ZK Proofs actually catch bad actors and enforce market integrity without turning these platforms into surveillance networks?
Yes, I think that's a great question, and this is exactly where the power of zero-knowledge proofs lets average users have and preserve their privacy while they're acting legitimately on top of these platforms like prediction markets, whereas there are still ways to enforce compliance and require actors, first of all, to prove that they acted reliably and with integrity, and also offering compliant ways in which to allow regulators with legal cause to inspect and see more of the actions that were done in case there was some wrongdoing.
Yeah, and finally, before I let you go, Eli, if these platforms do succumb to traditional surveillance, some might say they risk destroying the DNA that made them compelling. But if ZK compliance becomes the new standard, what do prediction markets look like, say, two years, five years from now?
First of all, they're prevalent and they are a very necessary tool for experts and those with knowledge in order to convert their knowledge, let's say, of, you know, geopolitics or, you know, weather or whatever it is, into monetization in a reliable and legal way.
Well, Eli, finally, before I let you go, when you mentioned weather, I thought of an incident that happened recently in France where the temperature was actually being manipulated using a hairdryer. So finally, before I let you go, what do you expect to see when it comes to the ZK space as we move forward?
The ZK proofs will allow folks to act, improve their reliability, but I, you know, they're not a cure for everything. So if a bad actor comes and, you know, with a hair dryer and blows hot air on a thermometer, this will still be something that is illegal and bad and needs to be pruned out. And yeah, I remember that incident was quite, quite, quite the, No failure.
Yeah, it does really highlight some of the risks out there when it does come to prediction markets. Eli, we are fast approaching the opening bell here in New York, so we will have to leave it there for today. Thank you so much for weighing in on a very complicated but very important topic today.
