Covering Cryptocurrency & Blockchain technology since 2015. Digital Nomad here in Asia
Blockchain technology is transforming multiple industries as new use cases for decentralized networks, products and services continue to emerge. The prediction market is one such sector that is rapidly adopting blockchain technology as new decentralized platforms are emerging to rival the existing centralized ones. By nature, the prediction markets depend on crowdsourcing information from the general public to form beliefs and forecasts about the occurrence of future events. As such, the prediction markets are a perfect fit for the application of blockchain technology, which itself is dependent upon crowdsourcing.
How the prediction markets work
Prediction markets refer to exchange-traded markets that are dependent upon the outcome of specified events. They are often referred to as betting, information, ideas, or event derivatives markets as they provide interested parties with the opportunity to make predictions about wide-ranging events and topics of interest. These can be as straightforward as predicting the next US president in an upcoming election to something as bold as forecasting next Tuesday’s weather.
The main aim of prediction markets is to elicit and aggregate beliefs about the outcome of a future event. The traders then bet on the beliefs that they think will be the outcome. The different beliefs have varying payoffs that are determined by the proportion of traders that bet on each outcome. The prediction market is therefore made up of these traders on opposing sides.
The prediction markets have become useful recently as they have been found to offer more accurate verifiable outcomes of various events in the public domain. One study found that the prediction markets were better placed to predict political outcomes more accurately than professional pollsters. Another study found that trading on orange juice futures could predict the weather more accurately as compared to professional weather institutions.
Limitations of centralized prediction markets
For a long time, the prediction markets have been run centrally by institutions with a greater degree of control over the trades. A centralized prediction market determines the events, participants, and rules of engagement. This brings about the following three issues:
Similar to mainstream financial markets, the prediction trade is limited by stringent regulations, capital controls, and national borders. As a result, the market operators and regulatory agencies have become gatekeepers using their power to determine who is allowed to participate and the events that they can bet on. This limits the number of outcomes that the traders can speculate on whilst eliminating the ability to create their own markets.
The centralized markets are constrained in such a manner that only low betting caps are allowed in an attempt to lower risks for the players. This bars highly-confident participants from placing huge bets to back their beliefs as it would sway the markets. Additionally, there is the lingering risk that the prediction markets could be easily shut down by regulatory agencies which discourages participation.
Participating in centralized prediction markets is a very costly affair as the gatekeepers charge high fees. Participants have to pay trading fees, deposit, and withdrawal fees while the market takes a proportion of their profits. This is a deterrent for willing participants as the high fees eat into their potential returns.
The blockchain connection
Adoption of blockchain technology in the prediction markets not only eliminates these issues but also confers multiple other benefits that encourage participation and create an environment for robust activities.
Decentralized prediction markets are open for anyone, anywhere to join and participate as they wish. Blockchain-based markets are public, peer-to-peer, permissionless…