1 TLDR

My core disagreement would be a kind of proof by contradiction. Weather derivatives or even things like volatility derivatives have the exact same problems you describe prediction markets as having, but we still have successfully created markets for them.

The history of how successful derivatives markets were created implies that prediction markets can look quite different from a central exchange for event contracts.

2 My objections - Contradicting examples

The article asserts the following things:

Prediction markets, unlike most asset markets, are zero-sum – in fact they are negative-sum, once you factor in platform fees.
…
We see this as the core demand issue with prediction markets: without savers or gamblers to add volume to the market, the market cannot attract enough sharps to create the liquidity to drive prices toward accuracy.

However, weather derivatives or even volatility derivatives suffer from the same problems and yet we have robust markets for both. What gives?

Volatility

Let's look at volatility as an example.

• VIX creates a puzzle for your description of prediction markets. It suffers from all the demand issues you identified, yet it somehow took off. (It's all sharps on sharps trading.)

• It's also zero-sum. In fact, all derivatives and insurance contracts are zero-sum in the way your article described.

• Even if you create and list a contract that people will eventually want to trade, it can take a long time for significant trading to actually occur. The FT has an Oral history of the fear index which points out that it took about 5-6 years from the listing of the VIX before significant volume was observed.

Weather derivatives

Or how about weather derivatives

• Weather derivatives also suffer from all the demand issues you identified. (It's all sharps on sharps trading). Yet it still trades quite a bit.

• It's also zero-sum in the way you described.

It’s not obvious to me that the reasons identified in the article are really a barrier to a particular financial product trading a lot.

3 The history of derivative markets - some alternatives

If I reflect on the history of derivative markets, a few things come to mind:

• We shouldn't expect that markets will create the right derivatives without a push. Financial markets often aren't that efficient at creating financial products, even if eventually people want them. For example, inflation indexed US bonds seemingly did not exist until TIPS were introduced by the government in 1997. Today, TIPS are hugely popular instruments. It seems reasonable to expect that something like NGDP futures won't exist until a government creates them - their current non-existence is not really a good indicator that they won’t eventually be popular.

• Exchange-traded and centrally cleared/margined markets are unnecessary for a successful prediction market. A successful derivative market can have contracts traded bilaterally (OTC) or through brokers. Many of the problems in the article get avoided if we consider that a successful prediction market can look quite different from an exchange. For example, a successful prediction market for climate change can look like the ability for a broker to get you four independent quotes for parametric weather insurance at a spread of selected locations.

• Government subsidisation for/creation of a prediction market isn't that unusual. The US Department of Agriculture essentially invented a set of weather derivatives (crop insurance provided by the FCIC) as a way to support American farmers, including the creation of the underlying weather measurements. See for example Rainfall Index. Given the sums of money involved, it seems totally reasonable for the US Department of Defence to spend a corresponding amount of effort into say a prediction market for war.