Prediction Market: A Collective Intelligence Experiment in the Encryption World

A prediction market is an open market that uses financial incentive mechanisms to forecast specific outcomes. These markets allow bets on the outcomes of various events, and the market prices can reflect the public's perception of the probability of those events occurring.

The typical trading range for prediction market contracts is between 0% and 100%. The most common form is the binary options market, where the price at expiration is either 0% or 100%. Users can also 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 a certain event. Traders with different viewpoints reflect their confidence in possible outcomes through trading contracts, and the market prices of these contracts are viewed as aggregated beliefs.

The history of prediction markets is long, almost as long as the history of human gambling. The combination of politics and prediction markets seems to have a long-standing history: in the Middle Ages, people were keen to predict and bet on the outcomes of papal elections.

As the U.S. presidential election approaches, interest in betting on the political sector reached a new peak in July. Events such as Trump's assassination attempt, Biden's withdrawal from the race, and the Democratic Party replacing Harris as a candidate have drawn widespread attention to prediction markets represented by a certain trading platform.

A Trading Platform: Order Book Available for Prediction Market

A certain trading platform is a decentralized prediction market project that was born in 2020, founded by Shayne Coplan, and supported by several well-known institutions and angel investors.

The platform allows users to trade on hot topics around the world ( such as politics, sports, and pop culture ), and users can build their investment portfolios based on predictions.

Unlike traditional sports betting, this platform allows users to freely trade shares on market topics that have not yet been concluded, enabling speculators to flexibly participate in probability gambling.

The platform uses a conditional token framework based on Gnosis. For every $1 of ERC20 token ( such as USDC) staked as collateral, two conditional tokens are produced, representing the occurrence or non-occurrence of the positive and negative outcomes of the event (. A multi-outcome market is a comprehensive statistic of multiple binary outcome markets.

Conditional tokens fluctuate in the market due to trading demand, and users can buy and sell at any time through the order book; they can also wait until the event has a result, and those holding the correct tokens will receive the entire $1 profit.

Since the two tokens are traded independently, there may be a situation where the sum of the prices of the two tokens does not equal 1 dollar, which requires the participation of market makers to balance the price difference. Before the event ends, it is also possible to exchange one positive and one negative token in the contract to redeem 1 dollar in collateral.

The prediction market of this platform mainly includes the following parts:

• Market Theme: Each prediction focuses on a specific theme or event. Users can submit proposals for new market creation, but the platform has discretion over which markets will be created.

• Oracle: Event outcome determination typically requires human input from an oracle. The platform uses UMA optimistic oracles, allowing anyone to submit a solution. If there is no challenge, the solution will be accepted. In case of disputes, it is decided by UMA token holders.

• Conditional Tokens: Lock 1 dollar to obtain two conditional tokens, "Yes" and "No". At settlement, the person holding the correct result receives the entire 1 dollar. The two tokens trade freely in the market, with prices reflecting probabilities.

• Order Book Market: Adopts a hybrid on-chain order book trading mechanism. Users authorize through signature, and the operator matches off-chain, ultimately interacting with the contract on-chain. The contract performs non-custodial settlement.

• Liquidity Providers: The platform allows trading of condition tokens freely before the results are out. Anyone can place limit orders to earn the bid-ask spread. The platform also offers additional USDC incentives.

The platform currently does not have a clear token issuance plan, nor does it actively incentivize users with a points program. However, this year it has distributed over $3 million USDC through a liquidity rewards program to enhance overall liquidity depth. The market with the highest trading volume pays liquidity providers approximately $600 USDC in rewards daily.

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A certain betting platform: Single-bet prediction market

A certain betting platform is a sports betting platform established in 2019, currently based on a dedicated chain built on Arbitrum Orbit Rollup.

The betting markets supported by the platform mainly focus on sports, with bets on winners of major events such as tennis, football, baseball, and basketball. Recently, it has also added cryptocurrency, popular encryption projects, and political segments, involving price trends of mainstream encryption assets and popular on-chain tokens, as well as topics related to the winners of the U.S. elections.

Unlike the platforms mentioned earlier, this platform follows a traditional sports betting model, only supporting single bets, and does not allow free trading of wagers until the results of the predicted events are determined.

The innovation of this platform lies in the implementation of a combination betting system for the first time. Users can make predictions on a series of events, and only if all are correct can they receive a reward. The bonus earnings from combination betting are often quite substantial and can be considered as leverage in the prediction market. The market makers on the platform will become the counterparty for the trades.

This type of combination betting is more similar to a lottery, potentially yielding huge returns of up to ten thousand times. Successful cases can easily go viral, which is also the most captivating aspect of traditional sports prediction markets.

Clearly, prediction markets based on the "dual-token" conditional framework find it difficult to achieve combination betting. This is because contracts cannot mint a conditional token for every possible combination of outcomes and ensure that it can trade freely under conditions of sufficient liquidity. Prediction markets with only two outcomes have limited odds, which may not be attractive enough to users.

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An AI Prediction Platform: Prediction Markets Based on AI-Pushed Topics

A certain AI prediction platform is a prediction market initially based on the Sei blockchain, covering a variety of topics such as politics, cryptocurrency price predictions, and popular events. It currently supports betting with USDC across multiple blockchains and has launched corresponding social media mini-programs. This mini-program offers users two modes: one is a game mode that earns points by predicting the probability of trending events; the other is a real mode where users can participate in betting on similar topics on the official website by linking their wallets.

Unlike other platforms where topics are primarily generated by user proposals, this platform's prediction topics are mostly generated by AI, which crawls popular news and market sentiment indexes from the internet, and automatically generates them for push to the website, where users spontaneously form trading markets. Although it supports multiple blockchains, it is not a fully decentralized application. The prices corresponding to different outcomes of various prediction topics are determined by the platform's centralized order book, while the ordering process and the market for each prediction topic are implemented according to smart contract rules.

Objectively speaking, this platform is still not mature enough compared to other prediction markets. The order book depth and betting volume for predictable topics on the website are far lower than those of other platforms. As a prediction market, it should allow users to freely trade tokens for different outcomes before the events are revealed. However, the platform's order book does not support users to place orders themselves. In the absence of market makers in most markets, users cannot actually trade outcome tokens freely. Furthermore, the documentation does not specify in detail how to ensure consistency among topic market contracts on different chains when implementing multi-chain betting support, as well as how to ensure that all probability outcome tokens have sufficient liquidity across chains. Under the "real mode" of the social media applet, there are discrepancies between the betting prices of the prediction market for the same topic and those on the official website when connecting wallets to trade.

Various circumstances have raised doubts about the practical usability and reliability of the platform. Overall, this product currently resembles a semi-finished product.

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A Certain Prediction Protocol: A Betting Protocol Supported by Liquidity Pools

A certain prediction protocol is not the prediction market itself, but rather a foundational protocol used to create on-chain prediction markets. This permissionless infrastructure includes on-chain smart contracts and web components, which can be used to establish multiple prediction market applications.

This protocol allows only a single bet and does not permit free trading between "yes" and "no" like some platforms; profit can only be gained after the results are announced.

The system is built around liquidity pools, and anyone can deploy their own liquidity pool by interacting with the factory contract. Multiple betting platforms can be created under a liquidity pool, and each betting platform can establish multiple possible events for different prediction topics, allowing for separate bets.

In the binary split model, liquidity is isolated and divided among multiple different prediction events. The protocol introduces the concept of "liquidity tree," which allows multiple bets on various events under a single prediction topic, and even across multiple topics and platforms, to share the same liquidity pool.

The liquidity tree provides a hierarchy, defining the range of liquidity for various possible events, such as the multiple score possibilities for a football match between two teams.

These liquidity funds ensure that the platform has the ability to act as the counterparty for bettors at any time, to pay potential bonuses ), which is a loss for LP (. If bettors generally incur losses, then LP can earn profits. A liquidity tree provides liquidity for multiple prediction topics simultaneously and generates profits/losses as a counterparty.

The odds for each event under this protocol are calculated based on the ratio of the funds bet on each event to the total liquidity range of the entire prediction market. The initial odds are set by specific data providers and correspondingly add initial liquidity. Data providers can also adjust the odds during the betting process, and the solvency of these odds is guaranteed by the initial liquidity.

The protocol also supports the implementation of multiple application platforms, where the betting platform can set its own handling fees and dividends, and bettors can choose freely; the creators of the liquidity pool can also set the dividend ratio for the pool. A certain proportion of the profits from all pools will enter the protocol's own DAO, and the protocol has also issued its own native token.

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Summary

The philosophy behind prediction markets is intriguing; participants aim for profit and view the free market as the most effective information-gathering system for humanity, thereby making predictions about real-world events. These outcomes are often surprisingly accurate. In contemporary society, where recommendation algorithms monopolize information, prediction markets seem to effectively restore the truth and reflect opinions, as evidenced by predictions of political events on certain platforms.

Many encryption users may have first encountered the prediction market during the last presidential election when a certain exchange launched a candidate index. With strong market-making capabilities, users can even participate with high leverage. Although it is centralized, it is indeed a very interesting experience.

Cryptocurrency has greatly reduced trading friction in prediction markets, providing better and more efficient market mechanisms. Based on the ideas of smart contracts and AMMs, it has also brought better mechanisms to prediction markets - no barriers to entry and better liquidity. Many AI Agent projects even view prediction markets as a playground for demonstrating collective intelligence and honing capabilities.

Of course, the drawbacks are also quite evident: some platforms, although they allow free trading of conditional tokens themselves, find it difficult to implement a flexible betting mechanism, lack high-return expectations, and lose some of the enjoyment for regular players; while some liquidity pool solutions are obviously still somewhat complex and lack the ability to re-trade after betting.

Rather than saying it is the mechanism and technological innovation, the current popularity of prediction markets should be viewed as another large-scale application of encryption culture, a victory of the free market culture behind it. This is particularly valuable in an era where algorithmic authoritarianism is gradually monopolizing information. After all, nothing is smarter than the market, and no information system is more efficient than the free market.

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