Prediction markets are one of the applications that have emerged under decentralized finance (DeFi).
Here, prediction markets are available without a third-party to administer trades and bets.
In simple terms, prediction markets let users make a choice whether something either will or will not. For example, a popular question in a prediction market was whether Donald Trump will win the U.S election in 2020 or not.
In the finance world, participants trade with contracts where the payoff will vary depending on the outcome of a future event. Prediction markets make the result of such a future event tradeable.
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Prediction market bets example areas include:
- Elections
- Sales of a company
- Price fluctuations of commodities
- Changes in the weather
Prediction markets however do not constitute gambling since payoff depends on the accurate prediction of an outcome of an event. Thefore, people are guided by the incentive to arrive at the corect conclusion. This also makes them a very efficient way at determining difficult issues.
Gambling, on the other hand, is a 50-50 event not influenced by external conditions.
The outcome in prediction markets usually aligns with facts, information, or knowledge that people seek to arrive at the right conclusion.
The way this market works is that if a futures contract stating that Candidate X will become president trades at 70 cents, then according to the market, there’s a 70% chance that Candidate X will win the elections.
If Candidate Y’s contract trades at 30 cents, the market puts their chances at 30%.
If the contract that you bought supports the eventual outcome, you will get $1 for that. Otherwise you get nothing.
As time goes by and more and more people buy the contracts, the prices will fluctuate depending on market conditions and the combined information held by market participants.
Prediction markets did not arrive with blockchain, just like exchanges and lending did not. However, unlike centralized platforms where information regarding the market might be withheld by the central authority to give them an advantage over market participants, in DeFi markets, information is available to everyone.
Some of the more popular crypto prediction markets include:
- Augur – a decentralized prediction market founded on Ethereum’s ERC-20 protocol
- TotemFi – a staking-based prediction markets platform
- Markets.vote – a prediction market and collective intelligence tool which uses quadratic voting and a decentralised identity system to curate emerging markets and reach consensus on the perceived future performance of assets
- OptionRoom – a fully decentralised forecasting protocol which allows users to speculate on the outcomes of real-world events
- PolyMarket – a decentralized market where users can trade the most debated events globally
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RECOMMENDED READING: An Introductory Guide into Quantitative / Algorithmic Trading in Crypto
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