Blockchain technology is transforming multiple industries as new use cases for decentralised networks, products and services continue to emerge. The prediction markets is one such sector that is rapidly adopting blockchain technology as new decentralised platforms are emerging to rival the existing centralised ones. By nature, the prediction markets depend on crowdsourcing information from the general public to form beliefs and forecasts about the occurrence of future events. As such, the prediction markets are a perfect fit for the application of blockchain technology, which itself is dependent upon crowdsourcing.
How the prediction markets work
Prediction markets refers to exchange-traded markets that are dependent upon the outcome of specified events. They are often referred to as betting, information, ideas, or event derivatives markets as they provide interested parties with the opportunity to make predictions about wide ranging events and topics of interest. These can be as straightforward as predicting the next US president in an upcoming election to something as bold as forecasting next Tuesday’s weather.
The main aim of prediction markets is to elicit and aggregate beliefs about the outcome of a future event. The traders then bet on the beliefs that they think will be the outcome. The different beliefs have varying payoffs that are determined by the proportion of traders that bet on each outcome. The prediction market is therefore made up of these traders on opposing sides.
The prediction markets have become useful recently as they have been found to offer more accurate verifiable outcomes of various events in the public domain. One study found that the prediction markets were better placed to predict political outcomes more accurately than professional pollsters. Another study found that trading on orange juice futures could predict the weather more accurately as compared to the professional weather institutions.
Limitations of centralised prediction markets
For a long time, the prediction markets have been run centrally by institutions with greater degree of control over the trades. A centralised prediction market determines the events, participants, and rules of engagement. This brings about the following three issues:
Similar to mainstream financial markets, the prediction trade is limited by the stringent regulations, capital controls, and national borders. As a result, the market operators and regulatory agencies have become gatekeepers using their power to determine who is allowed to participate and the events that they can bet on. This limits the number of outcomes that the traders can speculate on whilst eliminating the ability to create their own markets.
The centralised markets are constrained in such a manner that only low betting caps are allowed in an attempt to lower risks for the players. This bars highly confident participants from placing hueg bets to back their beliefs as it would sway the markets. Additionally, there is the lingering risk that the prediction markets could be easily shut down by regulatory agencies which discourages participation.
Participating in centralised prediction markets is a very costly affair as the gatekeepers charge high fees. Participants have to pay trading fees, deposit and withdrawal fees while the market market takes a proportion of their profits. This is a deterrent for willing participants as the high fees eat into their potential returns.
The blockchain connection
Adoption of blockchain technology in the prediction markets not only eliminates these issues but also confers multiple other benefits that encourage participation and create an environment for robust activities.
Decentralised prediction markets are open for anyone, anywhere to join and participate as they wish. Blockchain-based markets are public, peer-to-peer, permissionless networks that all interested participants can enter and bet on their forecasts. This openness and censorship resistant nature also enables anyone to create their own markets based on the events of their liking.
Blockchain-based prediction markets do not impose many charges on the participants. The only charges are the network fees that are required to keep the protocol secure. Usually, these are negligible thus players get to keep a substantial proportion of their winnings.
The network effects of decentralised prediction markets serve to lower the risk for the participants by keeping bad actors out. The platforms operate in a trustless environment where the players secure the network thus eliminating the counterparty risk involved with middlemen. They are also more resistant to censorship and corruption as they cannot be arbitrarily shut down by regulators as they transcend geographical restrictions.
The Rise of Decentralized Prediction Markets
The decentralised prediction markets have emerged over the past few years, providing participants with more efficient, cheap, and secure platforms for trading. Augur, Gnosis, and Polkamarkets are some of the leading platforms in the market today.
Augur is an Ethereum-based protocol that enables users to create their own prediction markets. The platform leverages smart contracts technology to build more sophisticated markets with cheaper and faster orders. Users also have greater access to liquidity on Augur as it aggregates buyers, sellers, and market makers under one roof thus greatly improving settlements in a robust market place.
Gnosis is also an Ethereum-based, open-source protocol for the DeFi predictions market. The platform allows users to directly trade cryptocurrencies, as a bet of their predicted outcome of an event in an open market. Its decentralised infrastructure also enables interested participants to create a prediction market or engage in the existing ones. users are free to interact in an open market through the power of smart contracts and receive outcome tokens through a secure settlement layer.
Polkamarkets, a new entrant to the prediction market, is built on the Polkadot network that allows users to take positions for wide ranging events in Esports, Crypto Futures, Sports, and Politics among others. The platform also has a financial & information marketplace where participants can Tokenize your knowledge and earn from forecasting.
Polkamarkets employs a new approach to the market by providing multiple avenues for monetising their predictions. Users can monetise their forecasts of future outcomes and events within an interoperable and decentralized infrastructure, where your beliefs become assets with financial value traded openly on the market. Participants can also participate by providing liquidity to the market and earn yield for their tokens.