Step by step, blockchain technology enters our lives through different spheres. In our previous articles, we touched on different areas of blockchain application. But in some cases, the blockchain has really become a breakthrough technology that has provided new directions for business. One of them is prediction markets.

They perform two functions:

  1. They allow everyone to bet on the outcome of any event;
  2. Use the "wisdom of the crowd" to predict using smart contracts. 

What is a prediction market?

The prediction market, or information market, is a kind of speculation on a variety of forecasts. Here, the value of the asset depends on the bet on the outcome of various events. This can be a weather forecast, the results of political elections, or trading predictions on the exchange rate of gold, oil or bitcoin.

Prediction markets have the so-called "wisdom of the crowd": when making a money bet on the probability of an event, players have to carefully weigh the pros and cons in order not to lose money, and in making these decisions they are helped by the analysis of the bets of other participants.

Such a mechanism, which takes into account the opinions of many motivated players who are rewarded for accuracy and are deprived of money for inaccuracy, allows prediction markets to effectively aggregate disparate information about the probability of an event, which is reflected by contract prices.

One of the main problems of information markets is the lack of anonymity and manipulation of events. However, blockchain solves them all by providing access to any network users, ensuring independence and transparency of all actions and outcomes of betting. All this leads to more accurate and objective forecasts.

Since humanity is always arguing and betting on different events, the use of decentralized technologies will make this process more transparent, honest and independent.

Let's look at a simple example.

The prediction market may ask, where will Wallmart open its new store?

Or who will win the election, which horse will finish faster, or whether a train will travel along this route in a couple of years. So let's go back to the next Wallmart store. Participants choose the outcome they like, for example New York, Boston or Chicago. And then according to the known scheme: if a victory, then $ 10 will be paid, or $ 0 if a loss.

The price of the forecasted market reflects the probability of the outcome expected by the market.Thus, observing the changes in market prices over time shows us how the estimates of the probability of market participants in relation to a certain outcome change.

Decentralized prediction markets

These markets are a completely new phenomenon based on blockchain technology.

  1. State regulation of such markets becomes almost impossible, and in the absence of a single center, it is simply impossible to close such markets.
  2. The creation of a global prediction market attracts a huge number of participants to it, which automatically makes forecasts more accurate.
  3. The issue of security is being resolved, because information about the actual outcome of the event enters the system in a decentralized manner, through consensus.

Betting on prediction markets

The internal structure of the prediction markets platform for betting on the outcome of events looks quite simple. This is a package of smart contracts on Ethereum or a similar blockchain that controls the acceptance of bets and their distribution to winners.

A smart contract is a contract between two parties that is embedded in the blockchain, where the fulfillment of the terms of the contract is regulated by computer code.

The four projects represented on the decentralized prediction markets are Augur (REP), Gnosis (GNO), STOX (STX), Cindicator (CND). All of them are decentralized dApps applications on the Ethereum platform, using ERC-20 tokens for internal payments.

Augur is the first and most famous ICO project in the prediction market sector. It is based on Ethereum and uses its own REP token for operations, which is sold on the following cryptocurrency exchanges (the list is incomplete):

  • Windows
  • Bibox
  • LATOKEN
  • Coinbase Pro
  • Binance
  • HitBTC
  • Coin Tiger
  • Kraken
  • Bitrix

Oracle

Blockchains are immutable registries that are protected from unauthorized access.

But the blockchain can interact with the outside world, through an Oracle?

Oracles themselves are not data sources, they are what transmits the truth about the real world to the blockchain. Activation of a smart contract is necessary to request data.

Example: you bet on the victory of team 1 in the Champions League final, and your friend bets on the victory of team 2. To place a bet, you lock your funds using a smart contract. But since the smart contract cannot interact with the data source from the outside, you connect oracle, which will provide all the necessary information, in this case about the winner of the Champions League final. After the match, oracle sends a request to a reliable source of information, receives information about the winner, transfers it to a smart contract and, as a result, the winner receives funds to his account.

The social value of prediction markets has not yet been fully realized. Experts believe that open decentralized systems will be at the center of rediscovering this valuable source of information and will help people around the world make more informed decisions in various aspects of their lives.

Check your knowledge!
What is a smart contract?
Contract embedded in the blockchain
Token purchase
Housing contract
Transaction between users
What projects are represented in decentralized prediction markets?
Gnosis (GNO)
Augur (REP)
Aegis (AEG)
SUPR (SU)
What is the first and best ICO project in the market forecasts?
SUPR (SU)
Aegis (AEG)
Gnosis (GNO)
Augur (REP)
You answered % of the questions correctly. Congratulations.
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