Table of Contents

• Introduction

• What is a prediction market?

• Why do prediction markets work?

• Prediction Markets and Blockchain Technology

  • Censorship Resistance

  • No middleman

  • No permission required

• Functions of blockchain oracles

• Summary

Introduction

When we happen to see the terms blockchain and market in the same sentence, we will undoubtedly think of the trading platform ecosystem that promotes the flourishing development of cryptocurrency transactions. system. Blockchain technology has extremely complete functions and is the foundation for all types of markets.

Financial assets are either tangible objects or intangible digital products. No matter what kind of asset, as long as there is holding value, there must be a potential market.

In this article, we take a look at a special market that significantly benefits from blockchain technology, namely prediction markets.

What is a prediction market?

Prediction markets are speculative markets where market participants do not trade options or cryptocurrencies, but trade information. Rather, investors place bets on the outcome of future events.

There are all kinds of events that can be bet on, provided that the broker is willing to put them on the sale list. Let's take for example a question with a "yes" or "no" answer: Will there be dedicated rail lines between the United States and Europe by 2025?

There are two potential outcomes for this event. Either "yes" or "no". If we were confident that there would be no trains running within five years, we could buy a series ofnocontracts. Pricing ranges from $0 to $1 per contract.

If the train does not run by the deadline, the no contract is worth $1 and the yes contract is worthless. On the other hand, if the train does run within the time limit, the no contract will be worthless, while the yes contract will be worth $1.

At the same time, contract values will fluctuate when market sentiment changes and new information emerges in the market. As mentioned in the example above, if the deadline approaches and underwater tunnel technology does not progress, the price of thenocontract may increase. If a major company announced plans to launch the train service in 2024, the price of the contract would rise.

This seems to be a typical speculative market. Participants purchase contracts and expect the contract value to grow over time. But prediction markets are far more than what we think of as ordinary speculation platforms. Prediction markets can be powerful forecasting tools if used correctly.

Why are prediction markets effective?

When placing bets, market participants are likely to have information that affects their decisions. Unlike regular bets, some external factors can affect the probability of a particular outcome.

Smart investors do their own research, and experts weigh the pros and cons. People who have inside information or are familiar with related topics will invest in contracts that they believe have the potential to appreciate in value. Simply put,prediction markets are information aggregators.

In the intercontinental train example above, if the no contract trades at $0.90 and the yes contract trades at $0.10, this It means that only a few people have confidence in the success of this prediction. Because those with information are financially rewarded for "reporting" what they know, the market's collective insight is reflected in the data.

Prediction markets are good at collecting and presenting information, based on the principle that the wisdom of crowds is usually better than the data mastered by a few experts. Market research found that stakeholders from all walks of life, whether from the IT or renewable energy industries, can benefit from understanding the ecosystem development trend forecast for their industry. Not only that, the market can accurately outline future development trends through crowdsourcing information.

Supporters even believe that prediction markets will become the core technology of a new form of democracy "Futarchy".

We don’t need a yes or no contract, we can just bet on mutually exclusive outcomes, such as the presidential election. Suppose Candidate A and Candidate B are running for president. If bettors believe that candidate A will win, they will buy the contract of candidate A, while supporters of candidate B will do the opposite.

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Prediction Market and Blockchain Technology

Prediction Market is Very Possible Becoming a powerful tool, its value proposition is greatly enhanced if it is decentralized. Current centralized platforms offer limited services, either restricted by local laws and regulations, or owners are unwilling to list certain contracts. Furthermore, users have to trust the operators of such platforms and pay additional fees to use platform services.

The traditional centralized model will be replaced by a decentralized approach based on blockchain. This brings benefits such as censorship resistance, cutting out the number of intermediaries, and improving accessibility.

Censorship-resistance

Existing prediction markets are usually operated by a single party. This means entities such as government authorities or criminals can easily shut it down. However, decentralized platforms are not so easily brought down.

After smart contracts participate in governance, single points of failure will no longer exist. Every node in the network can run code. If a contract is created in a certain way, no user can edit or delete the program that underpins that market.

No middlemen

Blockchain does not require administrators. Outsourced automated code replaces the work of traditional third parties, so there is no need for an intermediary. Users interact directly with smart contracts, which means they no longer need to pay fees to a third party (i.e., a centralized platform). Since users don’t have to trust anyone, this eliminates some counterparty risk.

No permission required

Through the decentralized prediction market, individuals can bet or create contracts freely anytime and anywhere. The geographical or regulatory restrictions that previously plagued the platform will no longer exist.

Function of blockchain oracles

Without a broker or any form of central authority, we How to determine what the result will be at expiration?

We need some kind of "truth" mechanism, and this is where the blockchain oracle comes into play. We want to leverage data sources to accurately inform whether an outcome occurred. To achieve this, here are a few possible ways.

The easiest way is to access third-party websites or data streams, which fundamentally undermines the use of blockchain. After all, the outcome will be in the hands of a third party, who may lie for personal gain or be targeted by would-be cheaters.

Another option is to use financial rewards to encourage users to report incidents truthfully. If a staking mechanism is implemented, users will need to stake tokens to report. If the reports are true, users will receive some form of compensation. If they try to cheat, they will lose their staked tokens. Augur, the first blockchain prediction market platform, uses this model to resolve disputes. Other platforms, such as Gnosis, allow users to choose centralized or decentralized solutions.

The use of blockchain oracles in prediction markets is an innovative concept. As an emerging technology, we have yet to determine which oracles are suitable for different types of prediction markets. Last year, Binance Research published a report on the issue. It is worth mentioning that this report pointed out the existence of design flaw attacks and other flaws in one of the most popular prediction markets.

Summary

The prediction market is not only an effective way to bet on future results, it is also an advanced means of collecting all reliable information. By using financial incentives for individuals to share their market information, we can gain insights into trends at a social, industry and political level.

For now, the shortcomings of centralized platforms prevent prediction markets from reaching their true potential. However, the situation is about to be reversed as soon as decentralized solutions take over. As oracles become more powerful, blockchain technology will be able to store provably fair codes that cannot be tampered with.