Using Blockchain for Prediction Markets
Prediction markets are speculative markets where investors bet on the outcomes of future events. While centralized prediction markets have limitations, decentralized blockchain-based alternatives provide numerous benefits, such as censorship resistance, fewer intermediaries, and improved accessibility. Decentralized prediction markets can be used to generate insights into various fields, and blockchain technology could host provably fair code that is immune to tampering, eliminating the need for third-party involvement and promoting trust in the system.
Basics
While blockchain technology is often associated with cryptocurrency trades, it has the potential to create markets beyond just the crypto space. Blockchain technology is versatile and can be used to build various types of markets.
Whether an asset is tangible or intangible, if it holds value, there is a potential market for it. Financial assets can take many forms, including physical objects or digital goods, and blockchain technology can enable the creation of markets for both.
What Are Prediction Markets?
Prediction markets are speculative markets where investors bet on the outcomes of future events. Any event can be traded on if a broker is willing to list it, such as whether a train from the US to Europe will run by 2025.
Investors can purchase "no" contracts if they believe the event won't happen and "yes" contracts if they believe it will. If the event occurs, "yes" contracts will be worth $1, and "no" contracts will be worth nothing, and vice versa if the event does not happen.
The value of contracts fluctuates based on market sentiment and new information. For instance, the price of "no" contracts might increase if there is no development in underwater tunnel technology, while the price of "yes" contracts might rise if a major company announces plans to roll out the train service.
Prediction markets are not your average speculative platform. They can be powerful forecasting instruments when used correctly.
Why Are Prediction Markets Useful?
Rather than trading traditional assets like options or cryptocurrencies, prediction markets enable investors to trade on the outcomes of future events. They function as aggregators of information, relying on the collective insights of the market participants to determine the likelihood of specific outcomes. In contrast to regular gambling, prediction markets incorporate external factors that can impact outcomes, making research and expert insights valuable to investors.
These markets excel at amassing and representing information, and stakeholders across various industries can benefit from understanding what the ecosystem believes is likely to occur. Prediction markets have even been proposed as a potential technology for a new form of democracy known as futarchy. In addition to yes and no contracts, prediction markets can use any mutually exclusive outcomes, such as a presidential election where betters can purchase contracts for the candidate they believe will win.
Prediction Markets and Blockchain Technology
Decentralization can add considerable value to prediction markets, which are currently limited in their offerings due to the centralized platform. Because of the reluctance of owners or regulations, some contracts cannot be listed. In addition, users must trust the platform operator and pay fees to use their services. By using blockchain-based decentralized alternatives, the current centralized model can be replaced.
Decentralization provides numerous benefits, such as censorship resistance, fewer intermediaries, and improved accessibility.
- Resistance to Censorship: prediction markets, which are usually operated by a single entity, are vulnerable to being shut down by government authorities or malicious actors. However, decentralized platforms are not easily taken down. Smart contracts enable the nodes on the network to run the code, and if the contracts are built in a specific way, the market's underlying programs cannot be edited or deleted by any user. This eliminates the risk of a single point of failure.
- No Third Party: decentralized blockchain networks eliminate the need for third-party administrators. Automated code performs the functions previously done by intermediaries, and users interact directly with smart contracts. As a result, users do not have to pay fees to a third party, and counterparty risk is reduced since they are not trusting anyone.
- Permissionless: decentralized prediction markets provide individuals worldwide with the freedom to place bets or create contracts that are accessible to users globally. The limitations of previous platforms caused by geography and regulation may no longer be an issue.
Blockchain Oracles
Decentralized prediction markets eliminate the need for intermediaries, but how do we determine the outcome when there's no central authority? This is where blockchain oracles come into play. To ensure the accuracy of outcomes, we need a source of data that's trustworthy. There are several ways to achieve this, including tapping into third-party feeds or incentivizing users to report truthfully.
The Augur platform employs a staking mechanism, where users report outcomes and receive remuneration for reporting correctly. However, users will lose their stake if they cheat. Gnosis offers centralized and decentralized solutions for reporting. However, the best approach to Oracle design for different types of prediction markets is still a new concept. In a recent report, Binance Research identified Design Flaw Attack and other flaws in one of the most popular implementations of prediction markets.
Conclusion
Individuals worldwide have the freedom to create contracts and place bets freely using decentralized prediction markets. By financially incentivizing users to share their knowledge on a market, we can generate insights into various fields. Centralized platforms have limitations that prevent prediction markets from reaching their full potential, but this could change with decentralized alternatives. Blockchain technology could host provably fair code that is immune to tampering, as more capable oracles are developed. This would eliminate the need for third-party involvement and promote trust in the system.