Crypto Case Study: Prediction Markets

Guides

Everyone thinks they can predict the future, whether it be predicting outcomes of government elections, weather, financial markets, or countless other future events. This has led to a rise of prediction markets in sports and equities, but the idea has yet to expand outwardly in other areas.

Problem

Digital prediction markets require a great deal of trust from their users. One centralized entity acts as the arbiter of outcomes, reporting outcome results and interacting with users who wish to argue any reported outcome. If the centralized party acts maliciously or under its own interest by falsely reporting outcomes or manipulating odds, users have no recourse. Additionally, the centralization of this process leaves a single point of attack, where hackers have the potential to manipulate the system and change outcomes in their best interest.

Current Options

There are countless options for predictions and derivatives markets based on the global equities markets. Additionally, sports predictions markets are also very prevalent across the globe, and with the United States recently legalizing sports gambling, there will surely be more saturation in the market upcoming. Other prediction markets, such as PredictIt, allow for forecasting of elections and other political events.

Crypto Solution

By utilizing a technology known as “oracles” along with distributing the reporting of outcomes across many stakeholders, the blockchain can be used to create a secure and optimal predictions market. Shares in an event outcome can be bought and sold up until the time of the event, with outcome prices fluctuating with the increase or decrease in the likelihood of a specific outcome.

The network comes to consensus on the outcome of an event, which makes manipulation highly unlikely and requiring a takeover of the entire network. By utilizing smart contracts on a decentralized prediction market platform, users can create predictions markets on their own, playing the role of the market maker and setting the price of a given outcome.

Crypto Projects

Augur was the first decentralized prediction market to jump on the scene, and, according to its website, “Augur allows users to trustlessly create prediction markets on the outcome of any future event.” The platform provides a financial incentive for token-holders to report event outcomes correctly as well as providing a platform for users to create markets themselves.

Gnosis is a similar project to Augur and was started by a former Augur founder, Matt Liston. Gnosis touts not only its use as a prediction market for betting but also for other use cases, such as travel insurance and price discovery.

Dan is a freelance cryptocurrency and blockchain content writer. He has written content for startups, ICOs, financial planners, venture capital firms, and more. Previously he founded an e-commerce company that grew to $1 million in revenue and profitability in less than 3 years. Dan has a degree in Economics and Finance from Bentley University.

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