Blockchain-based prediction markets and how they work

Of CNBCTV18.com September 22, 2022, 6:04 p.m IST (published)

Before we get into prediction markets and how blockchain technology is disrupting this space, let’s first understand typical markets and what they are. In its simplest form, a market is where services or goods, tangible or intangible, that have value, are bought and sold.

Prediction markets work in the same way, but the product is a contract on the outcome of an unknown future event. Essentially, predictions are bought and sold in the form of contracts, and these contracts will pay you big dividends if your prediction comes true. You can look at it this way: in the same way that futures markets allow traders to predict the future valuation of an asset, prediction markets allow traders to predict the outcome of future events.

For example, if the scenario is a cricket match between India and Australia, a prediction market might be selling contracts for an India win, an Australia win or a draw. Each of these contracts can have a value between $0 to $1. If you buy a prediction that comes true, you are rewarded with the contract’s total price, i.e. $1.

If the Indian team is in good form and has a winning streak going, the gains on this prediction may not be huge because the contract will be priced higher. On the other hand, if you buy contracts with an underdog gain and if they happen to win, you’re in for a more substantial payday.

The contracts, like stocks or crypto, have fluctuating prices based on buying and selling and also based on the stage of the match.

The role of blockchains in prediction markets

Blockchains have penetrated popular culture like nothing else and have begun to take over the prediction markets. It makes sense that blockchain technology is used for prediction markets because smart contracts are more reliable than people and organizations that may have their own interests.

So, in a blockchain-based prediction market, smart contracts handle the odds, the amount of funds collected from participants and the payouts at the end of the event. Smart contracts use oracles that help them identify variables and outcomes and act on them to execute agreements. For example, if there is a match between India and Australia, the outcome of the game is not entered by people but by oracles who get data from various reliable sources on the internet and then execute the contract.

Advantages of blockchain-based prediction markets

Blockchain-based prediction markets have many advantages over traditional prediction markets – let’s find out some of them.

1. No human errors: When people run prediction markets, human greed or just plain stupid mistakes can mean the difference between someone winning big and losing big. With blockchain based prediction markets, smart contracts are written to completely negate human interaction and all the errors that come with it.

2. The fee: When a person or organization creates a prediction market, there is a cost of operation that is paid indirectly by users in the form of fees. With blockchain-based prediction markets, you have a smart contract that needs neither money nor rest and works perfectly without complaints. Smart contracts also cut out middlemen, further reducing costs.

3. Free in the real sense: No government can influence a prediction market with blockchains and smart contracts. No organization can buy out, control or make it play for their interests. No censorship will apply and no geographical boundaries will stop people from participating.

Some existing blockchain-based prediction markets

There are many options out there for anyone looking to participate in blockchain-based prediction markets. Augur (REP) is one of the most popular platforms in this regard. It bills itself as a “global, no-limit betting platform” where users can place predictions on “sports, finance, world events and more.”

TotemFi (TOTM) is another popular blockchain-based prediction market. It is built on Ethereum and Binance Smart Chain and offers unique features such as non-punitive predictions and cooperation rewards. This means there are no penalties for inaccurate predictions and additional rewards for everyone if the average prediction is accurate.

At the time of writing, TOTM was trading at $0.02658, up more than 9 percent in the last 24 hours. On the other hand, REP traded at $7.07 up nearly 2 percent over the same period.

Conclusion

Blockchain-based prediction markets could change how betting works today – there would be more trust among users as no one would be incentivized to cheat them out of their money. We will soon be able to see smart contracts for creative prediction that have not been thought of before, and they will be more accessible to people and at a lower cost due to blockchains.