What is a Prediction Market?
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1. What is a Prediction Market?
A prediction market allows participants to place bets on the likelihood of future events. These events can range from cryptocurrency price movements to upgrades of specific protocols, among other things.
Prediction markets are often considered an effective way to aggregate information, as participants' betting behavior reflects their views on the probability of specific events occurring. In the cryptocurrency market, prediction markets can help investors and traders better understand market participants' expectations for future events, thereby guiding their investment decisions.
2. How Prediction Protocols Work
Prediction protocols are blockchain-based protocols that use smart contracts to manage the creation, trading, and resolution of events, ensuring that all transactions are transparent and automated. This decentralized design makes prediction markets fairer and more transparent, while also providing an effective means to aggregate information and predict the outcomes of market events.
Prediction protocols typically involve four steps:
Event Creation: Anyone can create an event on a prediction market platform. This event can be a prediction about anything, such as whether the price of BTC will reach $100,000 in this bull run, or real-world events like the results of the U.S. elections. The creator needs to specify the event description, the conditions under which it will occur, and the possible outcomes.
Market Trading: Once the event is created, participants can place bets on different outcomes in the market.
Event Resolution: After the event occurs, the platform needs a mechanism to determine the outcome of the event.
Result Settlement: Based on the outcome of the event, participants who placed correct bets will receive a certain proportion of the rewards, while those who bet incorrectly will lose their bets.
3. Advantages and Disadvantages of Decentralized Prediction Markets
3.1 Advantages
Transparency and Fairness: Decentralized prediction markets use blockchain technology, ensuring that all transactions and event resolution processes are transparent and can be viewed and verified by anyone. This provides higher fairness and transparency.
Trustlessness: Smart contracts automatically execute transactions and resolve events without relying on intermediaries to manage the market, reducing trust costs.
Globalization and Borderless: Anyone can participate at any time and from anywhere, which provides broader participation and liquidity.
Information Aggregation: Prediction markets aggregate participants' expectations of event outcomes, offering useful informational signals that help better predict event results.
3.2 Disadvantages
Transaction Costs: Decentralized prediction markets based on blockchain technology may face high transaction costs and slower transaction speeds, especially during network congestion.
User Experience: Novice users may face a learning curve when using decentralized prediction markets.
Data Source Reliability: The results of prediction markets often rely on external data sources, which must be reliable and accurate to avoid disputes.
Market Liquidity Issues: New or less popular markets may face liquidity issues, affecting users' trading experience and potential returns.
4. Notable Projects
According to the latest data from CoinGecko, the top ten prediction market projects by market capitalization are Gnosis, SX Network, Azuro Protocol, Kleros, Prosper, Augur, HILO, Polkamarkets, Zeitgeist, and PlotX.
Due to challenges such as insufficient market liquidity and irrational participant behavior in practical applications, many projects have chosen to shut down or pivot their direction. This section introduces some of the more well-known projects across different blockchains.
4.1 Polymarket
Polymarket is a blockchain-based decentralized prediction market platform that allows users to place bets on the future outcomes of various events using cryptocurrencies, including current popular topics like the U.S. elections and the results of the Olympics. Polymarket's smart contracts run on the Polygon network, significantly reducing transaction fees and improving transaction processing speed.
Known for its high transparency and user-friendly interaction experience, Polymarket has attracted a large number of users and followers. Recently, with the promotion driven by U.S. presidential candidate Donald Trump, Polymarket has become one of the largest cryptocurrency prediction platforms.
4.2 Augur (REP)
Augur is one of the earliest projects exploring open-source decentralized prediction markets, built on the Ethereum blockchain. In addition to allowing users to bet on event outcomes, it also enables users to create their own markets. The platform's native token, REP, is used for incentivization, market creation, and dispute resolution.
Augur's vision is to enable users to predict and trade various event outcomes through smart contracts and decentralized mechanisms. To address Ethereum's scalability challenges, Augur launched a Turbo version that leverages the Polygon network to enhance transaction efficiency and scalability, thereby improving user experience.
Currently, the Augur official website and related social media are no longer updated, and the project has been closed.
4.3 Gnosis (GNO)
Initially designed as a prediction platform similar to Augur, Gnosis pivoted its direction after failing to meet its initial goals. The Gnosis team has developed a range of products, including Gnosis Safe (multi-signature and programmable accounts), Gnosis Chain, Gnosis Protocol (CowSwap), Conditional Tokens (for prediction markets), Gnosis Auction, and Zodiac (standards and tools for composable DAOs).
4.4 Hedgehog
Hedgehog is a decentralized prediction market built on the Solana network. The platform's highlight is that all predictions are risk-free, meaning you will not lose your principal.
Before participating in predictions, users need to stake USDC to obtain a certain amount of game tokens used for predictions. Game tokens cannot be transferred and can only be used for participating in predictions. If the prediction is successful, users will receive a reward in the form of game tokens. Note that all market rewards are received and paid in game tokens.
Prediction markets not only provide users with potential earnings and entertainment but also serve as an important information source that helps users make informed decisions. This dual nature gives prediction markets a unique position and value in the cryptocurrency industry.
Disclaimer: This information does not provide advice on investment, taxation, legal, financial, accounting, consultation, or any other related services, nor does it constitute advice to purchase, sell, or hold any assets. MEXC Learn provides information for reference purposes only and does not constitute investment advice. Please ensure you fully understand the risks involved and exercise caution when investing. The platform is not responsible for users' investment decisions.