Prediction Market: Exploring New Investment Frontiers for the Future

A prediction market is an open trading platform that forecasts specific outcomes through financial incentive mechanisms. These markets allow participants to bet on various event outcomes, and the market prices reflect the collective judgment of the public on the probability of the event occurring.

The typical trading range for prediction market contracts is between 0% and 100%. The most common form is the binary options market, where the price at expiration is either 0% or 100%. Users can also sell options at the current market price to exit before the event occurs.

Through prediction markets, we can extract the collective future expectations of participants regarding a certain event from their betting behaviors. Traders with different viewpoints express their confidence in possible outcomes by buying and selling contracts, and the market price of the contracts is seen as the aggregated collective prediction.

Prediction markets have a long history, almost as long as the history of human gambling. Combining prediction markets with politics also seems to have a long tradition; as early as the Middle Ages, people were keen to bet on the outcomes of the elections of the Catholic Pope.

As the U.S. presidential election approaches, interest in political-related betting reached a new peak in July, especially around topics such as candidates being assassinated or withdrawing from the race. The prediction market represented by a well-known platform has attracted widespread attention.

A well-known platform: Order book trading prediction market

The platform is a decentralized prediction market project established in 2020, supported by several well-known institutions and investors.

The platform allows users to trade on various popular topics ( such as politics, sports, pop culture, etc. ) Users can build their investment portfolios based on their predictions.

Unlike traditional sports betting, this platform allows users to freely trade shares when the market is undecided, enabling speculators to flexibly participate in probability games.

The platform adopts a conditional token mechanism based on a certain framework. For every 1 dollar of token staked, two conditional tokens are generated, representing the positive and negative sides of the event outcome. The multi-outcome market is a comprehensive statistic of multiple binary outcome markets.

Conditional tokens can be freely traded in the market, with prices fluctuating based on supply and demand. Users can also wait until the event has a result, and those holding the correct tokens will receive the entire $1 profit.

Since the two tokens are traded independently, there may be instances where their combined price does not equal 1 dollar, necessitating the involvement of market makers to balance the price difference. Users can exchange one positive and one negative token for a 1 dollar pledge in the contract at any time.

The prediction market of the platform mainly includes the following parts:

• Market Theme: Each prediction focuses on a specific theme or event. While users can submit proposals for new market creations, the platform has the final say on which markets are created.

• Oracle: Event outcome determination usually requires manual input. The platform uses a certain optimistic oracle that allows anyone to submit solutions. If there are no challenges, the solution is accepted; in case of disputes, it is jointly decided by token holders.

• Conditional tokens: Lock 1 dollar to obtain two conditional tokens "Yes" and "No". At settlement, the winning side receives the entire 1 dollar. Tokens can be freely traded, and the price reflects the probability of the prediction.

• Order Book Market: Adopts a hybrid on-chain order book trading mechanism, where after user authorization, the operator matches orders off-chain, with final settlement on-chain. The contracts are settled in a non-custodial manner, and the operator does not hold the staked assets.

• Liquidity providers: Due to the allowance of free trading, token prices may deviate. Anyone can place limit orders to profit from the price difference, and the platform also offers additional incentives.

Currently, the platform has no plans for token issuance and no user points incentives. However, this year, over 3 million USDC has been distributed as rewards for market-making activities to enhance overall liquidity depth. The market with the highest trading volume pays liquidity providers about 600 USDC in rewards daily.

A Sports Betting Platform: Single Bet Prediction System

The platform is a sports betting project established in 2019, currently running on its own built chain.

The platform mainly supports betting on sports-related topics, including win/loss bets on major events such as tennis, football, baseball, and basketball. Recently, sections for cryptocurrency prices and political elections have also been added.

Unlike the aforementioned platforms, this platform adopts a traditional sports betting model, only supports single bets, and does not allow free trading of bets until the outcome of the predicted event is determined.

The innovation of this platform lies in the realization of a combination betting system for the first time. Users can make predictions on a series of events and must get them all right to win a prize. The returns from combination betting are often substantial and can be seen as a leverage mechanism for prediction markets. The platform will act as a counterparty for market making.

This type of combination betting is more akin to a lottery and can yield massive returns of up to ten thousand times. Successful cases can easily go viral, making it the most appealing aspect of traditional sports prediction markets.

Clearly, it is difficult to achieve composite betting in prediction markets based on the "dual-token" conditional framework. This is because contracts cannot mint conditional tokens for every possible outcome combination and ensure sufficient liquidity. In contrast, prediction markets with only two outcomes have limited odds, which may not be attractive enough.

An AI-driven prediction market: Topics pushed based on AI

The platform is a startup multi-chain prediction market covering various topics such as politics, cryptocurrency prices, and popular events. Currently, it supports betting with USDC on multiple blockchains and has launched a corresponding instant messaging mini-program.

The mini-program offers two modes: one is a game mode where you earn points by predicting the probabilities of hot events; the other is a real mode that links wallets to participate in betting on similar topics on the official website.

Unlike user-proposed topics, the prediction themes on this platform are primarily generated automatically by AI, which crawls popular news and market sentiment indices from the internet, and pushes them to the website to form a trading market. Although it supports multiple chains, it is not a fully decentralized application. The prices of various prediction results are determined by a centralized order book, while the ordering process and market are implemented through smart contract rules.

Objectively speaking, the platform is still relatively immature compared to other prediction markets. The order book depth and trading volume for predictable topics on the website are far lower than those of other platforms. As a prediction market, it should allow users to freely trade outcome tokens before the events are revealed. However, the platform's order book does not support users placing orders themselves. Most markets lack market makers, making it practically impossible for users to trade freely.

In addition, the document does not detail how to ensure the consistency of topic market contracts across different chains under multi-chain support, as well as how to guarantee the liquidity of probability result tokens on each chain. When connecting the wallet for transactions in the "real mode" of the app, there is a discrepancy between the prediction market for the same topic and the betting prices on the official website.

Various circumstances raise doubts about the platform's usability and reliability. Overall, this product currently resembles a semi-finished product.

A Prediction Market Protocol: Liquidity Pool Supported Betting System

This project is not the prediction market itself, but rather a foundational protocol for creating on-chain prediction markets. This permissionless infrastructure includes on-chain smart contracts and web components, which can be used to build multiple prediction market applications.

This protocol only allows for a single bet and does not allow for free trading between "yes" and "no" like some platforms; profits can only be obtained after the results are announced.

The protocol is built around liquidity pools, allowing anyone to deploy their own liquidity pool through factory contracts. Multiple betting platforms can be created under one pool, and each platform can establish multiple events for betting on different prediction topics.

Unlike the situation where liquidity is fragmented under the binary split model, this protocol proposes the concept of a "liquidity tree." This means that multiple bets on various events under a single prediction topic, as well as multiple topics across different platforms, can share the same liquidity pool.

The liquidity tree provides a hierarchy, with various possible events defining the range of liquidity, such as multiple score possibilities for a football match between two teams.

These funds ensure that the platform can act as the counterparty to pay potential prizes for bettors. If bettors generally incur losses, LP can profit. A liquidity tree provides liquidity for multiple prediction topics simultaneously and acts as the counterparty.

The odds for each event under the agreement are calculated based on the ratio of the funds bet on the event to the total liquidity of the entire subject. The initial odds are set by the data provider and initial liquidity is added. Providers can adjust the odds during the betting process, with solvency guaranteed by the initial liquidity.

The protocol also supports multiple application platforms, allowing the betting platform to set up handling bonuses, and bettors can choose freely; liquidity pool creators can also set the bonus ratio. A certain percentage of all pool profits goes into the governance organization of the protocol itself, and the protocol has also issued a native token.

Conclusion

The prediction market embodies interesting philosophical ideas. Participants, aiming for profit, view the free market as the most efficient information collection system for humanity, thereby predicting real-world events. These results are often unexpectedly accurate. In today's society, where information is monopolized by recommendation algorithms, prediction markets seem to effectively restore the truth and reflect diverse viewpoints, as evidenced by predictions about political events on certain platforms.

Many crypto users may have first encountered prediction markets during the last presidential election when a certain exchange launched a candidate index. With strong market-making capabilities, users can even engage with high leverage, and although it is centralized, it is indeed a very interesting experience.

Cryptocurrencies have greatly reduced trading friction in prediction markets, providing better and more efficient market mechanisms. Based on the ideas of smart contracts and automated market makers, they have also brought non-access barriers and better liquidity to prediction markets. Many AI projects even view prediction markets as a competitive arena to showcase collective intelligence and hone their capabilities.

Of course, the drawbacks are also obvious: while certain platforms have opened up free trading of conditional tokens, it is difficult to achieve a flexible betting mechanism, lacking high return expectations, which also diminishes some of the fun for ordinary players; meanwhile, liquidity pool solutions are obviously more complex and lack the ability for post-bet re-trading.

Rather than being a mechanism and technological innovation, the current popularity of prediction markets should be seen as another large-scale application of crypto culture, a victory of the free market culture behind it. This is particularly precious in an era where algorithmic authoritarianism gradually monopolizes information. After all, nothing is smarter than the market, and no information system is more effective than the free market.