The first prediction market in the world economy appeared in 1988, when elections were held for the president of a college affiliated with the University of Iowa. Traders were able to guess who would become the head of the institution. It turned out to be George Bush Sr.
When prediction markets were able to show a reliable prediction, similar platforms began to appear in large numbers. As often happens, with the emergence of the cryptocurrency segment, open blockchain prediction markets also emerged.
A prediction market is a speculative marketplace where each participant trades information about the possible outcome of events, not cryptocurrency assets. In fact, a prediction market is an aggregator of data for traders and investors.
Prediction market: the mechanism of action
On the blockchain, the prediction market works as follows. As an example, we can point to the Augur market. It uses the ETH network. A prediction event is published on the market, and users then make bets on it. The initiator of the prediction needs to make a payment in ETH cryptocurrency. He publishes a prediction, which can be anything, for example, what will be the price of the Bitcoin cryptocurrency in a month, $35,000 or $50,000?
Once the question is published, participants place bets, event-driven smart contracts are created to predict the cryptocurrency’s movement during the month.
An event smart contract is a digital contract that mathematically stipulates and spells out the possible outcome of an event, payment procedure, contract end date, and other metrics that must be met after the action occurs.
If a market participant believes that the price of an asset will fall, he will purchase an event contract to reduce the price. The value of the contract can be 10 REP tokens (internal Augur token). If the user assumes that the price of BTC will rise, he also purchases a contract, the price of which can be 20 REP tokens.
The price of the contracts will change as new data comes in from the cryptocurrency market. If the market is dominated by a bearish trend, the contract price for a negative movement of Bitcoin will rise, if a bullish trend is formed, then the price of the contract whose forecast is for an increase in the price of the asset will rise.
As soon as the month-long event contract expires and it turns out that the market value of the Bitcoin cryptocurrency has risen to $50,000, then at least 20 REP tokens will be received by those participants who made a forecast for an increase in price. Those who predicted that the price would fall receive nothing. A similar scheme works if the price of an asset declines.
The prediction market can ask any questions about cryptocurrencies and cryptocurrency exchanges.
The most famous prediction markets
The prediction market is not that widespread and is generally represented by only two dozen projects. For example, Augur, Gnosis, PlotX and others.
It is created on the base of ERC-20 protocol. For a fee, you can create a prediction market for any events. Creator puts event price from 0 to 50% and gets income from the collection. The trading commission is small. Augur has an internal REP token, it is used to create bets, it is also distributed between those who have correctly made a prediction on an event.
Based on ERC-20. Smart contracts on Ethereum protocol are used. Users can create a prediction market by forming a smart contract with a GNO or OWL token.
Created also on the Ethereum protocol. It is used for forecasts of the cryptocurrency market, events in the world economy and politics. It differs from the aforementioned markets by faster processing of transactions in the network. It has its own DPY token for trading on events.