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All About Prediction Markets

Mar 06, 2018

All About Prediction Markets
How does Prediction Markets work?

Prediction markets represent future outcomes.

Prediction markets are based on Binary events with the probability of an outcome, either it will happen or it won’t. The participants trade with contracts in the finance world where the payoff is ascertained depending on the result of a future event. Through Prediction markets the outcome of a future event is traded.

It involves placing a bet on the chances of occurrence of a certain event in specific circumstances such as determining sales of a company, ascertaining the price of a commodity with respect to its influencing factors, forecasting election results and change in weather as well.

In most of the cases, the value of the bet is directly related to the probability of materializing of an outcome.

The degree of payoff received in the prediction market is measured in terms of the level of accuracy of the outcome of an event. Which means with an aim to be more accurate,  participants will get implicated in more in-depth research. With the larger number of people getting involved in the market research to be more deriving towards a precise conclusion, the outcome gets affected by market forces and lean towards the favorable side.

As in case of gambling, there are no market forces to manipulate the results; it is entirely about luck. For e.g., When we flip a coin, there are 50% chances of heads and 50% chances of tails as well. There is no external force to affect the outcome. Thus, it is pure gambling.

Whereas prediction markets rely on the wisdom of a number of people working on ascertaining the probability of materializing of an outcome.

What procedure is followed by prediction markets?

On the basis of a contract of the expected outcome.

The participants get involved in an agreement form forecasting the possible outcome.

The working of Prediction Markets can be understood with the help of an example related to Presidential elections.

In Future contracts, an individual or a group place a bet on possible outcome based on their research. If the predicted outcome occurs, the punter gets $1, and if it does not, he gets nothing.

If a future contract states that candidate will become president trades at 70 cents; It means that market believes that there are 70% chances that candidate X will win the elections.

If the contract of candidate Y trades at 30 cents, it means that 30% of the market has put its stake on the victory of candidate Y.

If at the end of the result you are on the winning side you will get $1, and if your forecast does not materialize, you get $0.

The prices get influenced by the market forces such as more and more people gathering information and buying contracts.

What defines efficiency of Prediction markets and how blockchain technology can affect?

Prediction markets rely on the agglomerate perspective of many, instead of only an individual’s research.

A group of people with specialized knowledge can present more substantial and wider scope of a piece of information than an individual.

Participants have started putting real money on the stake to move towards the outcome. The theory behind is that if you have your money at stake, you will put more efforts in extensive research aiming to determine the most accurate result.

To enjoy economic benefits,  a participant must make sure either to be an expert in the respective field or conduct extensive market research.

Decentralisation is the biggest advantage.

Decentralization characteristic of Blockchain Technology allows elimination of middleman or central authority and trading in the absence of a third party.

As there is no third party conducting the trading and transactions, it results in a reduction in fees as well. The participants can enter into a predictive contract without any association with a broker to manage to trade.

On a Centralised platform, the information regarding the market influencers can be withheld by the central authority giving them an advantage over market participants to manipulate the outcome.

Whereas In the decentralized platform, the entire information is unveiled in front of the public which can be accessed by everyone.

How can we apply Prediction Markets to use in real case?

The disputes can be solved via voting.

The primary motive of these markets is to ascertain the outcome of an event which can be used as oracles as well.

To understand the Blockchain oracles let’s take an instance of a Freelance market.

A freelance market built on the grounds of Blockchain Technology with benefits of decentralization. As there is no central authority, so there is no complexity of tasks, no censorship and reduced fees.

With the elimination of centralization, there is no one to control disputes as well. For such scenario, it is crucial to have a dispute resolution which is generally attained through a process of voting as in case of prediction market where wise masses achieve consensus.

How better scaling in dispute resolution is achieved by decentralized freelancing networks?

Accumulation of voting resources at one place results in a bottleneck.

In other networks, the consensus is attained through a voting mechanism. In the absence of voting hierarchy, everyone can vote on everything. It is like traditional operations of supreme court where the legal body has to listen to every case which results in the creation of bottleneck.

In the decentralized freelance market, the above-stated working is not feasible as there can be so many disputes between a freelancer a job creator at a time which can affect the delivery of finished product.

Cryptotask is a blockchain based freelancing network that randomly selects a panel for each task. Interested participants could check off the chain if they were chosen for the panel and vote on dispute if the were. All they need to do is to prove on the chain that they are the selected ones.

Unlike Prediction market, the worth of a task in the decentralized Freelance market is fixed.

Therefore, task markets easily scale a review process as it is necessary in case of dispute only and in the majority of cases the reviewing process don’t need freelancer and task creator for arbitration.

Explanation of the review process and its benefits.

It starts with investing in tokens.

As per Crypto Task, the reviewers are token holders and participate by putting an amount on the stake as equal to the value of the task. It implies that stakeholders already have a chance of being selected. The probability of selection is directly related to the individual’s stake.

When selected, a reviewer is asked to cast a vote whether the task was completed or not. In case the decision taken by a participant is opposite to that of consensus or if the participant does not cast a vote. Even then the participant does not lose their staked amount.

Benefits of such system:

  • The selection process is secretive and prevents influencing of consensus through any conspiracy.
  • It follows a two-stage voting process (secretly commit and then reveal) which means reviewer cannot vote according to the majority. In order to review they need to vote first.
  • Generally, the selected reviewers would be experts with relatively large token sales and thus in a better position to vote on the dispute.