What is Prediction Market — The next trend in the crypto space?
Decentralized finance creates a big opportunity for developers and marketplaces to challenge many of the markets on centralized platforms. Decentralized spaces have created futures markets, options markets, and other types of derivatives using blockchain technology. Another interesting new option is the Decentralized Prediction Market. Additionally, Vitalk Buterin — Founder of Ethereum made an opinion about its potential: “Honestly prediction markets may be one of the most underrated categories of Ethereum Dapps right now”. For this reason, forbitswap is excited to release the new advanced function Decentralized Prediction Market on our platform.
What is a Decentralized Prediction Market?
A decentralized Prediction Market is a type of prediction market that operates on a blockchain network. Unlike traditional prediction markets that are often centralized and run by a single organization or entity, Decentralized Prediction Markets are designed to be trustless and operate without a central authority or intermediary.
Users in a Decentralized Prediction Market can easily buy and sell contracts based on future events, and the price of each contract reflects the collective belief of the participants about the likelihood of a particular event occurring.
The advantages of Decentralized Prediction Markets?
Decentralized Prediction Markets have several advantages over traditional prediction markets, which are typically centralized and controlled by a single entity. Some of these advantages include:
- Transparency: Decentralized prediction markets are built on blockchain technology, which provides an immutable and transparent ledger of all transactions. This means that all trades and payouts are publicly visible, which ensures that the market is fair and that no one can manipulate the outcome.
- Security: Because decentralized prediction markets are built on blockchain technology, they are highly secure and resistant to hacking and other forms of attack. This ensures that users can trust the platform and that their funds are safe.
- Decentralization: Decentralized prediction markets are not controlled by any single entity, but rather are governed by a decentralized network of users. This means that there is no single point of failure and that the market is resistant to censorship and other forms of interference.
- Lower fees: Decentralized prediction markets typically have lower fees than traditional prediction markets, because there is no need to pay for the overhead associated with a centralized organization.
- Global accessibility: Decentralized prediction markets are accessible to anyone with an internet connection, regardless of their location or financial status. This means that anyone can participate in the market and potentially profit from their predictions.
Overall, Decentralized Prediction Markets offer a more transparent, secure, and accessible way to engage in prediction trading.
How does a Decentralized Prediction Market work?
There are two types of shares in a prediction market: YES and NO. The price of each share depends on the result of a particular event. In a simple prediction market, each YES share’s price is a dollar if the event in question occurs and has no value if it does not occur. Conversely, each NO share’s price is a dollar if the event does not occur and has no value if it does.
What factor determines the price of these shares? Prices in Prediction Markets can be interpreted as probabilities. Let’s have a look at a simple instance.
In November 2020, there was a big historic election between Biden and Trump in the United States. There’s a 50% chance for both shares if one of them got elected. After the Prediction Market is open for trading shares, if each Trump share costs 60 cents, that means the market thinks there’s a 60% chance that Trump will win the election. If each Biden share costs 40 cents, that means the market thinks there’s a 40% chance that Biden will win.
Buyers want to buy at price as low as possible and sellers want to sell at price as high as possible. If a buyer and seller agree on a price, you get a trade. The present price in a market is the meeting point of buyers and sellers: an equilibrium that represents the highest price buyers will pay and the lowest price sellers will accept.
Potential of Decentralized Prediction Markets
Decentralized Prediction Markets have been gaining popularity in recent years as blockchain technology has matured and become more widely adopted. These markets offer several advantages over traditional prediction markets, including transparency, security, decentralization, lower fees, and global accessibility.
One of the main drivers behind the rise of decentralized prediction markets is the growing demand for decentralized finance (DeFi) applications. DeFi aims to create a more open and transparent financial system that is not controlled by centralized institutions. Decentralized prediction markets fit within this broader DeFi ecosystem by providing a decentralized platform for users to trade prediction tokens.
Another factor driving the rise of decentralized prediction markets is the increasing interest in cryptocurrency and blockchain technology among investors and traders. These markets allow users to speculate on the future price of cryptocurrencies and other assets, which can be highly volatile and difficult to predict. Decentralized Prediction Markets offer a way to hedge against this volatility and potentially profit from accurate predictions.
Overall, the rise of Decentralized Prediction Markets reflects a broader shift toward decentralized and open financial systems. These markets offer a new way for users to engage in prediction trading and potentially earn profits, while also providing greater transparency, security, and accessibility than traditional prediction markets.
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