Prediction Market: The Convergence of Financial Incentives and Collective Intelligence

A prediction market is an open market that uses financial incentives to forecast specific outcomes. These markets allow traders to bet on the outcomes of various events, and the market prices reflect the collective judgment of the public regarding the probability of the events occurring.

A typical prediction market contract trades within a range of 0% to 100%, with the most common form being a binary options market where the price is either 0% or 100% at expiration. Users can sell their options at market price to exit before the event occurs.

The principle of prediction markets is to extract the public's future expectations from the pricing of a group of participants betting on the outcome of a certain event. Traders with differing opinions express their confidence in possible outcomes by buying and selling contracts, with the market price of the contracts being seen as a summary of opinions.

Prediction markets have a long history, almost as long as the history of human gambling. Political predictions have been popular throughout history, and in the Middle Ages, people were keen on betting on the outcomes of papal elections.

As the U.S. elections approach, interest in politically related bets peaked in July, drawing widespread attention to some prediction market platforms.

Polymarket: tradable prediction market

Polymarket is a decentralized prediction market project established in 2020 that allows users to trade on hot topics. Unlike traditional sports betting, Polymarket supports the free trading of shares while the outcomes of events are still uncertain.

Polymarket uses a mechanism based on a conditional token framework, where every $1 of collateral generates two conditional tokens representing the positive and negative outcomes. These tokens can be freely traded in the market and can also be redeemed for profits after the event concludes.

The core components of Polymarket include:

• Market Theme: Focused on predicting specific events
• Oracle: Uses optimistic oracle mechanism to determine results
• Conditional tokens: represent trading targets for different outcomes
• Order Book Market: A hybrid mechanism of off-chain matching and on-chain settlement
• Liquidity providers: Earn profits by making markets

Polymarket currently has no token plans, but incentivizes market-making activities through liquidity rewards.

SX Bet: Traditional Sports Betting Model

SX Bet is a sports betting platform established in 2019, currently primarily supporting betting on sports events, and has recently added options for cryptocurrency and political topics.

Unlike Polymarket, SX Bet adopts a traditional sports betting model, only supporting single bets, and bets cannot be traded before the outcome is determined. SX Bet's innovation lies in the implementation of a combination betting system, allowing users to predict a series of events, where all must be correct to win a substantial prize.

Pred X: AI-driven prediction market

Pred X is a multi-chain prediction market platform that covers a variety of topics including politics and cryptocurrencies. Its unique feature is the use of AI to automatically generate prediction topics and push them to the platform.

Pred X supports multiple blockchains, but it is not completely decentralized. The prices of various prediction topics are determined by a centralized order book, while the ordering process follows the rules of smart contracts.

However, Pred X still has some issues, such as insufficient order book depth and unclear multi-chain consistency, overall it still seems to be in the early stages of development.

Azuro: A Betting Protocol Based on Liquidity Pools

Azuro is not a prediction market itself, but a foundational protocol for creating on-chain prediction markets. It supports multiple application platforms built on the same infrastructure.

The core of Azuro is the liquidity pool system. A liquidity pool can support multiple betting platforms and prediction topics, realizing what is known as the "liquidity tree" structure. This design allows different events and topics to share liquidity.

The odds of Azuro are calculated based on the ratio of the betting funds to the total liquidity, with the initial odds set by data providers. The system also supports the integration of multiple application platforms and establishes a profit-sharing mechanism for all participants.

Conclusion

Prediction markets demonstrate the potential of a free market as an information collection system. The application of cryptographic technology reduces trading friction and provides better market mechanisms. However, existing solutions still have some limitations, such as balancing flexibility and liquidity.

The rise of prediction markets reflects the popularity of crypto culture and highlights the value of free markets. In an era of increasing information monopoly, this market-based mechanism is particularly valuable.