Only KYC can stop insider trading on prediction markets, Messari says

Prediction markets, decentralized platforms allowing users to speculate on the outcomes of future events, have rapidly grown but face a foundational hurdle: the pervasive threat of insider trading. Crypto research firm Messari recently issued a definitive analysis asserting that Know Your Customer (KYC) protocols are not merely a useful tool, but the *only* effective deterrent against insider trading activities on these platforms.

The core issue stems from the pseudonymous and permissionless nature of decentralized finance (DeFi). Prediction markets often deal with sensitive real-world events, such as regulatory approvals, corporate mergers, or political decisions. Individuals possessing non-public, material information (insiders) can easily capitalize on this informational asymmetry to guarantee profits, undermining the fairness of the market and damaging its integrity. Since user activity is linked only to a pseudonymous wallet address, existing regulatory bodies lack the necessary levers to investigate or prosecute malfeasance.

Messari argues that while decentralized mechanisms aimed at market integrity—such as security deposits or reputation systems—can deter low-level fraud, they are insufficient to counter the significant financial incentive associated with major insider trading events. Only the threat of real-world consequences, facilitated by identity verification, can serve as an adequate preventative measure.

Implementing robust KYC links the on-chain identity (the wallet) to a verified off-chain identity. This shift introduces the capability for regulatory oversight and potential legal action, thereby transforming prediction markets from untraceable speculative arenas into environments where accountability is mandatory.

This finding presents a critical crossroads for the prediction market sector. While the adoption of KYC conflicts with the core maximalist ethos of full decentralization and anonymity, Messari’s report underscores the necessity of regulatory compliance for widespread legitimacy. If prediction markets are to achieve mainstream adoption and handle high-value forecasting events, the industry must embrace identity verification as an essential operational safeguard against market abuse.

Source: Only KYC can stop insider trading on prediction markets, Messari says