Prediction Market: Future Predictions Under Financial Incentives

A prediction market is an open market that predicts specific outcomes through financial incentive mechanisms. These markets establish trading platforms for various event outcomes, and market prices can reflect the public's views on the probability of the event occurring.

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

Through prediction markets, we can extract the public's future expectations from the value judgments of the betting community regarding the outcomes of certain events. Traders with differing opinions will reflect their confidence in possible outcomes through trading contracts, and the market prices of these contracts are seen as aggregated beliefs.

The history of prediction markets is long, almost as long as the history of human gambling. Political predictions seem to have existed since ancient times: during the Middle Ages, people were keen to bet on the outcomes of papal elections.

As the U.S. presidential election approaches, interest in political-related betting reached a new high in July, drawing widespread attention to several prediction market platforms.

Polymarket: tradable prediction market

Polymarket is a decentralized prediction market project established in 2020, founded by Shayne Coplan, and supported by several well-known institutions and investors.

The platform allows users to trade on controversial topics around the world, including politics, sports, and pop culture. Users can build their portfolios based on their predictions.

Unlike traditional sports betting, Polymarket allows users to freely trade shares on market topics that are undecided, enabling speculators to flexibly participate in probability games.

Polymarket uses a mechanism based on a conditional token framework, where for every 1 dollar of collateral invested, two conditional tokens are generated, representing the positive and negative sides of the event outcome. These tokens can be freely traded in the market, and price fluctuations reflect changes in demand. Users can buy and sell at any time through the order book, or wait to receive profits after the event outcome is announced.

Due to the independent trading of the two tokens, there may be situations where the sum of their prices does not equal 1 dollar, which requires market makers to participate in arbitrage. Users can also exchange one positive and one negative token to redeem a 1 dollar stake.

The prediction market of Polymarket mainly includes the following parts:

• Market Theme: Each prediction focuses on a specific theme or event, and Polymarket has discretion in market creation.

• Oracle: Uses UMA optimistic oracle, allowing anyone to submit results, which will be accepted if there are no challenges. In case of disputes, decisions are made by UMA token holders.

• Conditional Tokens: Lock 1 dollar to obtain two conditional tokens "Yes" and "No"; the winning party will receive the entire 1 dollar upon settlement.

• Order Book Market: A hybrid on-chain order book trading mechanism, user authorization, off-chain matching by operators, and on-chain settlement.

• Liquidity providers: Earn price differences by placing limit orders, Polymarket offers additional USDC incentives.

Polymarket currently has no token plans, but incentivizes market making through liquidity rewards by distributing USDC.

SX Bet: Single Bet Prediction Platform

SX Bet is a sports betting platform based on Ethereum, currently operating on SX Chain. It mainly supports sports-related bets and has recently added cryptocurrency and political topics.

Unlike Polymarket, SX Bet only supports single bets and does not allow trading of stakes until the result is determined. Its innovation lies in implementing a combination betting system, where users can predict combinations of multiple events, and only if all are correct can they win, offering potentially huge returns.

Combo betting is similar to lottery tickets and can yield returns of up to ten thousand times, making it easy to spread virally. This is the most attractive aspect of traditional sports prediction markets, but it is difficult to achieve in prediction markets based on a "dual-token" framework.

Pred X: Prediction Market for AI-Pushed Topics

Pred X is a multi-chain prediction market platform covering topics such as politics, cryptocurrency prices, and popular events. It supports betting with USDC across multiple blockchains and has launched a Telegram mini program.

Unlike user-generated topics, Pred X mainly uses AI to automatically scrape trending news to create prediction topics. Although it supports multiple chains, it is not fully decentralized, as prices are determined by a centralized order book.

Pred X is currently still not mature enough, with low order book depth and trading volume. It does not support users placing orders on their own, and the lack of market makers makes free trading difficult. The implementation details of multi-chain support are also not clear enough. Overall, this product currently resembles a semi-finished product.

Azuro: Betting Protocol Supported by Liquidity Pools

Azuro is a foundational protocol for creating on-chain prediction markets, including smart contracts and web components. Multiple prediction market applications can be built on top of it.

Azuro only supports single bets and cannot trade "yes" and "no" tokens freely like Polymarket. Its system is centered around a liquidity pool, allowing multiple betting platforms to share the same liquidity pool.

Azuro introduced the concept of "liquidity tree", allowing different themes and platforms to share liquidity. The odds are calculated based on the ratio of the betting funds to the total liquidity, and the initial odds are set by data providers.

Azuro supports multiple dapp platforms and allows for the setting of dividend ratios. All profit portions from the pools enter the Azuro DAO, which issues the native token $AZUR.

Conclusion

Prediction markets use free markets as information gathering systems to predict real-world events. Cryptocurrencies reduce transaction friction, and smart contracts and AMMs provide better market mechanisms.

The rise of prediction markets reflects the popularization of crypto culture and embodies the value of free market culture. In an era where algorithms increasingly dominate information, such a market-based information system is particularly valuable.