Decentralized Prediction Market — Not Just a Speculative Gambling
“Prediction markets are valuable as an epistemic tool, and there is a genuine benefit from using cryptocurrency in making these markets more trustworthy and more globally accessible.” — Vitalik Buterin.
In an article on 5th Dec 2022 — Vitalik reminded about the growth of the prediction market in the application of Ethereum ecosystem in the future. The expectation of Vitalik was prediction markets did not make extreme multibillion-dollar splashes, but continued to steadily grow and become more useful over time.
Decentralized finance opens the door for developers and marketplaces to emulate many of the markets found on centralized platforms.Blockchain technology has been used by decentralized marketplaces to establish futures markets, options markets, and other derivatives. The DeFi prediction market — one of the new decentralized finance tools made available by the use of smart contracts.
What is a decentralized prediction market?
This new part of the decentralized finance world enables people to buy and sell contracts based on future events. Whereas futures markets allow traders to predict the future price of an underlying asset, prediction markets enable traders to predict future events that don’t relate to an underlying asset’s price. Prediction market contracts often involve the outcomes of real-world events like election results, political, sport event or the weather of specific places.
The difference between the basic prediction market and the decentralized prediction market is the use of smart contracts to eliminate the need for a central party or single operator to bring two parties together. Many of these DeFi markets use quadratic voting, allowing market participants to allocate more votes toward a particular contract if they feel strongly about it. The quadratic voting formula is the square of votes.
The basic mechanic of a decentralized prediction market
Most prediction markets are a binary options markets (e.g., “yes” or “no”), where the two options will expire at the price of 0% or 100%. Before expiry, the two assets trade between 0% and 100%, which indicates what the marketplace thinks the odds are. Let’s have an example. If the market price of token A is $0.30 and the price of token B is $0.70, then the market believes the likelihood of team B winning is approximately 70%.
The advantage of decentralized prediction markets
Decentralized prediction markets offer several advantages over traditional centralized prediction markets, including:
Decentralization: Decentralized prediction markets are not controlled by any single entity, which makes them more resistant to censorship, manipulation, and fraud.
Transparency: Decentralized prediction markets are transparent and audited, increasing trust and accountability.
Accessibility: Decentralized prediction markets are open to anyone with an internet connection and can be accessed from anywhere in the world. This means that participants can come from different backgrounds and bring diverse perspectives, which can lead to more accurate predictions.
Incentivization: Decentralized prediction markets use blockchain-based tokens as incentives to encourage participation and accurate prediction. This incentivization can increase the number of participants and the quality of the predictions.
Some regular prediction markets:
Polymarket: is a prediction market platform on the Polygon blockchain that allows users to bet on events related to politics, sports, finance, and entertainment.
forbitswap: forbitswap is a decentralized exchange and the first P2P prediction market built on top of Move Language. forbitswap uses the AMM mechanic to evaluate predictions on several events such as politics, sports, esports, etc.
Gnosis: provides a prediction market for sports, entertainment, and financial events.
Augur: This is a prediction platform built on Ethereum which allows users to predict upcoming events.
Conclusion
Prediction markets are just one way of using smart contracts and decentralizing technology to be creative. It has also been an excellent demonstration of the power of blockchains; in fact, it is one of the applications that have provided the most concrete value. Overall, decentralized prediction markets offer a more trustworthy, transparent, and accessible platform for prediction-making.
