We are down Ben today (I guess exploring Seoul is a decent excuse), so Byron from The Breakdown newsletter is filling in for him. Enjoy a smattering of Byron’s latest musings, and we’ll see you on Monday!

Predicting markets, Tether, retro-futurism 

South Park on prediction markets

Episode 5, Season 27 of South Park is dedicated to prediction markets — a crowning achievement for the crypto-adjacent way to bet on anything and everything.

In the playground of South Park Elementary School, Cartman explains to his friends that prediction markets are “online peer-to-peer betting” with fun things to bet on, like “Will school lunch have tater tots next week?”

It’s satire, of course. 

But also not a terrible idea: Playground prediction markets might be the best math lesson schools could offer.

The South Park kids certainly need some help. Seeing the 55% odds that tater tots will be on offer next week, Cartman’s friend Kyle complains, “So I’d only win, like, 5 bucks on a $2 bet?”

His actual payout would have been just $0.90.

That was not the episode's only teachable moment.

In trying to get a prediction market about his mom taken down, Kyle asks, “What’s the CFTC?” 

I suspect that was the first mention many South Park viewers had ever heard of the government agency that regulates derivatives markets.

There were lessons in trading and investing to be had, as well.

Early in the episode, Cartman tells his friends that prediction markets can be manipulated: “It’s called a conflict of interest, guys. It’s a way to make free money.”

Later, he learns that markets rarely (if ever) offer money for free.

The adults also have some learning to do. “Let’s take the long odds,” one of the moms tells the others. “That makes these apps more fun.”

The narrative arc of the episode follows Cartman’s rollercoaster ride of emotion as he first thinks he has a sure-thing bet, then thinks he’s lost it all, and then (spoiler alert) finds out he would have won big if he stuck with it.

It’s an excellent distillation of the behavioral finance involved in investing and trading.

The episode is also a surprisingly accurate depiction of what prediction markets are all about — and how hard it is to predict markets.

It’s very funny, too.

Tether values itself at $500 billion

You wouldn’t normally expect a company making nearly $5 billion per quarter to raise capital from investors, but Tether isn’t a normal company.

Tether’s CEO says the new funds would be used to “maximize the scale of the Company’s strategy.” But I can’t imagine it needs investors’ money to do that.

More telling, I think, is its intention to raise from “a selected group of high-profile key investors.”

Tether has always operated in a legal gray zone: tolerated by US authorities, but not officially sanctioned.

If it ever wants to emerge into the light, now would be the time. And having a few influential people on its cap table will presumably facilitate that.

But is Tether doing those people a favor by selling them equity at a $500 billion valuation?

That would value the stablecoin issuer on par with OpenAI, which seems crazily disproportionate.

Yes, Tether is a wildly profitable company. Operating on something like 99% profit margins, it might even be the most profitable company of all time on a per-employee basis (it’s thought to have only about 50 people on staff).

And yes, OpenAI is a wildly unprofitable company, burning through an estimated $5 billion a year.

But every equity investment is worth the net present value of its future cash flows, so what’s happening in the present is not particularly important.

This is why, for example, investors don’t mind when Mark Zuckerberg says he’s not afraid of misspending $200 billion of their money, as he did this week.

And why Nvidia shareholders are happy to see Nvidia invest $100 billion of their money in OpenAI. Even if OpenAI turns out to be a zero, it won’t affect the discounted cash flow value of Nvidia shares.

It’s hard to say the same for Tether.

At $500 billion, the company would be selling equity at roughly 77x earnings, which is an AI-like, high-growth valuation.

But where is this growth meant to come from?

It’s reasonable to think the stablecoin market will 10x from here. 

It seems unreasonable to think Tether will maintain anything like its current 60% share of that market — or its 99% profit margins.

Margins are lower outside of legal gray zones. 

So, no, I don’t think Tether is doing anyone a favor by selling them equity at $500 billion.

Who they did do a giant favor for is Cantor Fitzgerald, which bought 5% of Tether at a $12 billion valuation less than a year ago.

If Tether raises at $500 billion, Cantor will be up 42x on that investment, making its $600 million investment worth $25 billion.

That is how you make a friend for life.

Vitalik’s retro-futurism

In his latest blog post, Vitalik introduces retro-futurism — a vision of the world that’s both cutting-edge and charmingly old-fashioned.

On the futuristic side, he imagines secure personal devices, open-weight AI assistants, verifiable health wearables and civic systems built on cryptography and crowd-sourced verification. 

On the retro side, he imagines citizens protecting their individual sovereignty by tinkering with those open-source systems: “The infrastructure is free for people to take apart, verify and modify to suit their own needs.”

Vitalik seems to envision people dismantling these “open-source and verifiable” systems in the same way, say, a 19th century farmer might have dismantled his farm equipment to repair it himself.

Back then, self-sovereignty meant doing things for yourself.

Today’s digital tools are far more complex, but Vitalik thinks that by making it “a socially encouraged hobby” to tinker with them, people could be their own masters again.

It’s an appealing vision, but I’m not sure how popular that hobby will be because tinkering with open-source systems is hard.

Case in point: Vitalik started a firestorm on X by this week by saying, “Base is doing things the right way.”

This seemingly innocuous statement quickly got contentious as people debated whether Base, a layer-two blockchain with a single sequencer, has the ability to steal people’s funds.

Justin Bons, who is sure it does, went so far as to accuse Vitalik of making “blatantly false statements.” 

Equally credentialed commentators countered that it’s Vitalik’s critics who are lying.

The inner workings of blockchains are complicated enough that it’s near-impossible to say who’s right — which makes me question how realistic Vitalik’s vision of a retro-future is.

If the experts can’t agree on how sovereign a layer-two blockchain is, how likely is it that hobbyists will win their own sovereignty by tinkering with systems that are far more complex?

Still, I hope he’s right — I, too, want to tinker my way to independence.

And if we are ever going to get there, crypto’s signature mix of contentious debate and turning everything into a bet is probably, well…our best bet.

— Byron

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