Prediction markets are platforms that allow users to bet on future events. Odds are usually dependent on the possibility of the event in question happening – lower odds (more likely an event happens) pay out less than higher odds (less likely an event happens), and it is easy to understand why this is the case. More participants end up betting on the more likely scenario, so if they are correct in their prediction, the prize pool is split across a larger number of participants, resulting in smaller payouts and vice versa.
Prediction markets span many different industries, from sports to finance to real-life events like elections. There is some debate about whether or not prediction markets qualify as gambling platforms. One side argues that they do since users are betting on events, while the other side believes predicting the right outcomes requires a level of skill and/or knowledge, and thus is not entirely based on luck.
With the meteoric rise in adoption of blockchain technology within recent years, there have been ongoing discussions about the fact blockchain is the perfect infrastructure for prediction markets to be built on top of. In this article, we discuss the current state of prediction markets in the crypto industry and highlight the teams and protocols building applications for them. We will also touch on the challenges facing prediction markets and what their future looks like.
The transparency of the blockchain makes it a lot easier to build trust in the platform and verify its fairness in paying out forecasters. This factor, along with the ability to bet on an event using cryptocurrencies, makes blockchain the right place for a prediction market.
Polymarket is the biggest decentralized prediction market, and it’s easy to see why. If you visit their website, you can scroll through all types of events to bet on, from things like the Fed interest rates to whether or not aliens will be confirmed to exist by the end of 2023. Sports, politics, finance, social media, recent trends… you name it, and they most likely have a prediction market for it. Polymarket is built on Polygon, so users can save even more fees when placing their bets since they do not need to worry about ETH mainnet gas fees.
Augur is a prediction market built on Ethereum. It is coincidentally one of the very first Ethereum dApps to launch, having ICO’d in 2015 and launched three years after. On their website, Augur boasts no limits, lower fees, and global access, which are problems that plague traditional prediction markets that are notorious for their high fees and limits on bet size.
Gnosis launched in 2015 with the intention of becoming a decentralized prediction market on Ethereum, similar to Augur. Eventually, Gnosis evolved into an open framework, now known as Gnosis Chain. Prediction markets are now built on top of Gnosis Chain in the form of third-party dApps, one of which being Azuro.
Azuro is a decentralized prediction market built on Gnosis. Earlier this year, Azuro expanded their offering to include Polygon. They share successful bets placed on their platform on their X page. Recently, they announced the roll out of Azuro Score, a loyalty program that rewards you with points the more bets you place on Azuro. The points you earn will eventually be converted into your share of Azuro’s native token, $AZUR.
Waterfall is an NFT trading protocol with a built-in feature of predicting on NFT prices. Users can purchase shards (fractions) of listed NFTs to make predictions of the sale price of the NFT and its shards.
There is no shortage in challenges facing the adoption of prediction markets. The two main ones every prediction market has to tackle when coming to existence are liquidity and legal concerns. Markets need to have enough liquidity for forecasters to be able to place bets efficiently without skewing the odds drastically. This is one of the tougher battles facing new teams because they need to either have enough players providing liquidity or provide the liquidity themselves, which is unfeasible in the long run. The second challenge facing prediction markets is regulation. Prediction markets are still regarded as gambling platforms and are effectively under the same scrutiny. Online gambling is still illegal in many places, including the United States. Other countries prefer to go on a case by case basis, and have legalized some gambling games but not others. The lack of regulatory clarity remains a problem.
All in all, prediction markets are poised to fulfill their potential if they can get past the things that hold them back, most notably the struggle to provide sufficient liquidity, especially in niche markets. If this problem is resolved, we can expect to see forecasters begin to bet on all types of events. An avid CTF fan could, for instance, bet on what player he/she thinks will get First Blood (be the first person to solve the puzzle) on Curta. This is not currently feasible because of the small audience for a market like this, but if liquidity were not an issue, we could see more events like this surface.