Prediction Market: Collective Intelligence under Financial Incentive Mechanisms

A prediction market is an open trading platform that predicts the outcomes of specific events through financial incentive mechanisms. These markets allow participants to bet on the possible outcomes of various events. Market prices often reflect the collective judgment of the public regarding the probability of an event occurring.

The typical price range for a prediction market contract is between 0% and 100%. The most common form is a binary options market, where the price at expiration is either 0% or 100%. Users can also sell options at market price before the event outcome is revealed.

Through prediction markets, we can extract the public's expectations about the future outcomes of an event from the betting behaviors of participants. Traders with differing viewpoints express their confidence in possible outcomes by buying and selling contracts, and the market prices of these contracts are viewed as the aggregated group predictions.

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

As the U.S. presidential election approaches, interest in betting on politically related topics reached new heights in July. Events such as the assassination of Trump, Biden's withdrawal from the race, and the Democratic Party replacing Harris as a candidate have garnered widespread attention for prediction markets represented by a certain prediction platform.

Order Book Tradable Prediction Market

A decentralized prediction market project was established in 2020, receiving support from several well-known institutions and investors. The platform allows users to trade on controversial topics in the world ( such as politics, sports, pop culture, etc. Users can build investment portfolios based on their predictions.

Unlike traditional sports betting, this platform allows users to freely trade shares in market topics that are yet to be concluded, enabling speculators to flexibly participate in probability games.

The platform uses a conditional token framework based on a certain protocol. For every 1 dollar of stablecoin collateral invested, two conditional tokens are produced, representing the positive and negative sides of the event outcome. 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, where those holding the correct token receive the entire $1 profit.

Because the two tokens trade independently, it is possible for their combined price not to equal 1 dollar, which requires market makers to participate in balancing the price. Before the event ends, users can exchange one positive and one negative token for 1 dollar in the contract at any time.

The prediction market mainly consists of the following parts:

• Market Theme: Each prediction focuses on a specific theme or event, and the platform has discretion in creating the market.
• Oracle: Used a certain optimistic oracle that allows anyone to submit solutions.
• Conditional tokens: Lock 1 dollar to obtain "yes" and "no" tokens, with the winning side receiving the entire 1 dollar upon settlement.
• Order Book Market: Adopts a hybrid on-chain order book trading mechanism.
• Liquidity providers: Anyone can earn the price difference by placing limit orders, and the platform also offers additional incentives.

The platform currently has no plans for token issuance, but has distributed over $3 million USDC this year to incentivize market-making activities to enhance overall liquidity depth. The market with the highest trading volume pays liquidity providers a reward of about 600 USDC daily.

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Single Bet Prediction Platform

A sports betting platform was established in 2019, initially based on Ethereum, and currently relies on its self-built L2 chain.

The betting markets supported by the platform mainly focus on sports, including betting on the outcomes of major events such as tennis, football, baseball, and basketball. Recently, cryptocurrency and political sections have been added, allowing predictions on the price trends of mainstream crypto assets and the results of the U.S. presidential election.

Unlike the aforementioned platforms, this platform operates according to the traditional sports betting model, only supports single bets, and does not allow free trading of bets until the outcome of the predicted event is determined.

The innovation of this platform lies in the implementation of a combination betting system for the first time, where users make predictions on a series of events, and only if all are correct can they receive a reward. The prize earnings from combination betting are often quite substantial and can be regarded as a leverage in the prediction market. The platform's market makers will become the counterparties.

This type of combination betting is more like a lottery, capable of bringing huge returns of up to 10,000 times. The "get rich" stories can easily go viral, making it the most attractive aspect of traditional sports prediction markets.

It is obvious that a prediction market based on the "dual-token" conditional framework cannot achieve combination betting, as it is impossible for the contract to mint conditional tokens for every possible outcome combination while ensuring sufficient liquidity. A prediction market with only two outcomes has limited odds and may lack appeal to users.

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Prediction Market Based on AI-Pushed Topics

A certain prediction market was 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 on multiple blockchains and has launched a Telegram mini-program.

The platform's mini program offers two modes: one is a game mode that earns points by predicting the probability of hot events; the other is a real mode that connects wallets to participate in betting on similar topics on the official website.

Unlike the generation of topics proposed by users in the community, the platform's prediction topics are primarily automatically generated and pushed to the site by AI, which captures popular news and market sentiment indices through the internet, allowing users to spontaneously form trading markets. Although it supports multiple chains, it is not a fully decentralized application. The different result prices of each prediction topic are determined by a centralized order book of the platform, while the order placement process and the market for each prediction topic are implemented based on smart contract rules.

Objectively speaking, this platform is still not mature enough compared to other prediction markets. The order book depth and trading volume for predictable topics on the website are far lower than those on other platforms. As a prediction market, it should allow users to freely trade outcome tokens before the event is revealed. However, the platform's order book does not support users placing orders themselves. In the absence of market makers in most markets, users are practically unable to freely trade outcome tokens.

In addition, the document does not detail how to ensure the consistency of topic market contracts across different chains when implementing multi-chain betting support, as well as how to guarantee sufficient liquidity for all probability result tokens on each chain. When connecting wallets for trading in the "real mode" of the app, there are discrepancies between the prediction market of the same topic and the betting prices on the official website.

Various current situations raise doubts about the practicality and reliability of the platform. Overall, this product currently resembles a semi-finished product.

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Bet Protocol Supported by Liquidity Pools

A certain project is not the prediction market itself, but 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 project can only place a single bet and cannot freely trade "yes" and "no" like the aforementioned platform, and can only earn profits after the results are announced.

In this system, the liquidity pool is the core. Anyone can deploy their own liquidity pool by interacting with the factory contract. Multiple platforms can be created under one liquidity pool, and multiple possible events can be established for betting on different prediction topics under each platform.

The project proposes the concept of "liquidity tree", which means that multiple events under a prediction topic, as well as multiple topics and multiple betting platforms, can share the same liquidity pool. The liquidity tree provides a hierarchy, delineating the liquidity range for different possible events.

These liquidity funds ensure that the platform can always act as a counterparty for bettors, paying out potential bonuses. If bettors generally incur losses, LP can profit. A liquidity tree provides liquidity for multiple prediction topics simultaneously and generates profits and losses as a counterparty.

The odds for each event in this system are calculated based on the ratio of the betting funds for that event to the total liquidity of the entire prediction market. The initial odds are set by a specific data provider, who also adds the initial liquidity accordingly. The data provider can also adjust the odds during the betting process, and the solvency of these odds is guaranteed by the initial liquidity.

The project also supports multiple dapp platforms, allowing the betting platform to set its own handling fee dividends, and bettors can choose freely; liquidity pool creators can also set the pool's dividend ratio. A certain percentage of the profits from all pools goes into the project's own DAO, and the project has also issued its native token.

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Summary

The concept behind prediction markets is quite philosophical. Participants aim for profit and view the free market as the most effective information gathering system for humanity, thus making predictions about real-world events. These results are often surprisingly accurate. In a contemporary society where recommendation algorithms monopolize information, prediction markets seem to effectively restore truth and reflect opinions, as evidenced by predictions related to political events on certain platforms.

Many cryptocurrency users first encountered prediction markets 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 a centralized platform, it does provide a very interesting experience.

Cryptocurrencies have greatly reduced the trading friction in prediction markets, providing better and more efficient market mechanisms. Based on the ideas of smart contracts and AMM, they have also brought no barriers to entry and better liquidity to prediction markets. Many AI AgentFi projects even regard prediction markets as an arena to leverage collective intelligence and hone their abilities.

Of course, the flaws are also obvious: while a certain platform has opened up the free trading of conditional tokens, it is difficult to achieve a flexible betting mechanism, lacks high return expectations, and has lost some interest from ordinary players; while a certain project’s liquidity pool solution seems overly complex and lacks the ability for post-betting re-trading.

Rather than saying that the mechanism and technological innovation are the reasons for the current popularity of prediction markets, it should be viewed as another mass adoption of crypto culture, a victory of the free market culture behind it. In today's world, where algorithmic authority gradually monopolizes information, this is particularly valuable. After all, nothing is smarter than the market, and no information system is more efficient than the free market.

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