Decentralized Prediction Markets
Do you want to know who will win the next Superbowl? Or what are Donald Trump’s chances of getting re-elected? How about the time it will take for a medic somewhere to discover the cure for cancer?
Humans have sought the trait of prediction since time immemorial. This was superstitious in the ancient times but has become more sophisticated in recent decades through developments like gambling. This industry could hit the $ 1 trillion mark globally by 2021. Certainly, this is a ridiculous amount to spend on what is considered by most a vice.
How about if this bad habit was used for good? Gambling inadvertently produces a lot of valuable information when the right questions are asked. This, channeled in the form of prediction markets, can enable people bet on real world events. This brings us to the focus of this article; decentralized prediction markets.
Prediction markets have been around for longer than many would think. The political future markets date back to 16th century Italy. This was the first domain and prediction markets extended over time to sectors such as the value of gold and later stock markets.
The developments have resulted in a pretty sophisticated and most times remarkably accurate prediction market. This is because the collective opinion provides accurate forecasts. In addition to that, investment markets provided a great tool for hedging against risks.
Friedrich Hayek, one of the all-time cited economists perhaps put it best; -prediction markets are
“mechanisms for collecting vast amounts of information held by individuals and synthesizing it into a useful data point.”
How Prediction Markets Work
Placing a bet on the prediction market is comparable to buying a share in the predicted outcome. An example is predicting that the price of Bitcoin will pass the 10k mark by close of the year. The probability of the event happening starts at 50/50. If you prediction is that it will, it means you stake your bet on the yes bet.
Like in normal gambling, return down for the side that more investors flock to. Notably, there are three types of prediction markets. These are the binary markets which have two yes or no outcomes, the scalar markets which have a range of outcomes and the categorical market which has multiple options.
What is The Implication of Prediction Markets?
Herd mentality may be frowned upon in conventional life but is pretty much the mechanism that informs prediction markets. You may come across the term ‘wisdom of the crowd’. This is because the collective opinion of a group may form a reliable forecast of markets. If more people put money in a certain expected outcome, then it is more likely than not to happen. After all, they probably analyzed carefully and came up with a reasonable conclusion.
The implication of this forecast is valuable insights that provide outlook as to the political trends or sporting outcomes for example. Besides, prediction markets empower an investor with information. This information can be used to access profit for investment opportunities not publicly available.
This is not to say that prediction markets get it right all the time. You have probably heard of President Trump gloating of how no one saw his election coming. This and Brexit is one of the areas prediction markets have got it wrong. A feasible explanation is the strong personal conviction most people had towards this rather than basing their conclusion on analytics.
Decentralized Prediction Markets
There is a major reason why decentralization optimizes prediction markets. This is user independence and anonymity. Additionally, the permissionless nature of blockchain means a diverse range of people gather producing a highly informed aggregated forecast.
The anonymity and transparency of the Blockchain means that no central authority can manipulate individual actors. Decentralization means freedom from censorship and a cost free market for the market maker.
That said, the legal regulatory hurdles on decentralized prediction markets pose a challenge. Most governments classify them under gambling or optional trading both heavily regulated. Another thing to note is that you can create even the most audacious markets on the decentralized network. Examples are prediction markets on terrorist events, assassinations and drug prices.
An Overview of Some Prediction Markets
Prediction markets on the blockchain are still getting their feet set. This is because the Blockchain technology itself is pretty new and the entire system is slowly permeating various sectors.
The most prominent example is the Augur platform. Augur enjoys the status of the most recognizable prediction markets subsequently being the most successful one. Let’s highlight a few others.
This platform utilizes blockchain to eliminate middlemen and promote transparency and censorship resistance. The development team indicated focus on the prediction markets pertaining to insurance, information and financial markets.
The basic functionality involves a smart contract framework that supports the decentralized prediction market. This project is growing well and should have a stable future.
Stox aims to bring blockchain based prediction markets to the masses. As a result, the platform has a simple design convenient even for those with little understanding of the blockchain.
Stox token (STX) will be used in opening events and also trading outcome shares. Moreover, it will be used for all activities on the prediction market DApps.
Other examples are Fun Fair, Bodhi, which was the first decentralized prediction market to launch, and Etheroll. The former is themed more on gaming.
Decentralized prediction market platforms bring a level of efficiency to the prediction market industry never seen before. This development is a revolution in and of itself. Regardless, regulation still looms large on the future of this sector.
This is an innovative tool and should be treated as an asset. Augur has shown the way and this should not be different for developing platforms. Therefore, we should nurture rather than limit them.