In the past few months, you might have heard about decentralized prediction markets, but are aware of how these markets function differently from the traditional prediction market. Before understanding the mechanism of these markets, let’s delve deeper to understand what basically an online prediction market in general words is known for. 

What are Online Prediction Markets?   

The concept of online prediction markets is based on collectively forecasting events and placing financial stakes to potentially earn a profit from accurate predictions. 

For example, if a candidate is competing in an election and I, as an individual, believe they are likely to win, I can place a bet on that candidate through a prediction or betting platform. If my prediction is correct, I stand to earn money. However, in many countries, betting and prediction platforms are still heavily restricted.

In the billion-dollar prediction market, some leading names include Bet365, Parimatch, Unibet, Betway, 1xbet, and several others. The global online sports betting market was valued at approximately USD 56.65 billion in 2023, it could grow to USD 146.36 billion by 2032, with a compound annual growth rate (CAGR) of 11.2% anticipated for the forecast period spanning 2024 to 2032.

Working Mechanism of Online Prediction/Betting Markets

Online prediction and betting markets operate through three main types of systems. Fixed-odds betting involves odds set by the platform or bookmakers. For example, a 10 USD bet at 2:1 odds could return 20 USD if your prediction is correct. These odds are determined using statistical models and historical data to balance risks.

In Exchange Betting (Peer-to-Peer), users bet against each other rather than the platform. For instance, one user might bet on Team A to win while another backs Team B. The platform facilitates the exchange and ensures payouts.

Prediction Markets function like financial markets, where participants buy and sell “shares” tied to the probability of an event occurring. Share prices fluctuate based on demand, reflecting collective sentiment. For instance, a share priced at 0.70 USD implies a 70 percent chance of the event happening.

Odds or probabilities are determined differently across these markets. In fixed-odds betting, bookmakers use data and models to set odds. In prediction markets, prices evolve dynamically as users trade shares, representing the crowd’s perceived probability. This dynamic nature makes prediction markets valuable tools for forecasting while fixed-odds and exchange betting cater more to traditional gambling preferences.

What are Decentralized Prediction Markets? 

As per available data, Decentralized prediction markets are ecosystems that enable users to bet on the outcomes of various events without relying on a central authority or intermediary. These markets are typically built on blockchain technology, which ensures transparency, security, and automation through smart contracts.

A few key features make these different from are:- 

1. Decentralized– These predictions are fully decentralized which means there is no central authority and are fully automated smart contracts. 

2. Accessibility– As we all know there are only a few names in the market that lead operations in dozens of nations, but it is worth noting that decentralized markets could be accessed from any corner of the world. 

3. Less transaction fees– According to available data the transaction fees on prediction in a decentralized market are charged less compared to the traditional market. 

Users create or participate in markets by staking cryptocurrency to predict the outcome of an event. Shares are bought and sold, with prices reflecting the collective belief in an event’s likelihood. After the event concludes, smart contracts automatically distribute winnings to correct predictions.

Risks of Traditional Prediction Market

In centralized prediction markets, market manipulation is a significant risk, as participants, market manipulation is a significant risk, as participants with large stakes or market makers can place large bets to influence the odds, thereby skewing the market and distorting outcomes.

This manipulation can mislead other users, causing them to make decisions based on distorted probabilities. Additionally, there is the risk of bookmaker control, where the odds and event outcomes are set by the platform operator. 

Regulatory and legal risks also exist, as traditional betting markets are governed by different legal frameworks depending on the jurisdiction. Operators may face penalties or closures, potentially causing users in regions with strict gambling laws to lose access to the platform or their funds. 

Risks of Decentralized Prediction Markets

Decentralized prediction markets carry unique risks primarily due to their reliance on blockchain technology and smart contracts. One significant risk is related to smart contract bugs and vulnerabilities. Decentralized platforms use smart contracts to automate the process of bet settlements and payouts.

Another critical risk is Oracle risk. Decentralized prediction markets depend on external data providers, called oracles, to supply accurate real-world event information onto the blockchain. If these oracles are compromised or provide incorrect data, the market’s outcomes can be distorted. 

Low liquidity is also a concern in decentralized prediction markets, particularly for niche or less popular events. If there aren’t enough participants, users may struggle to enter or exit positions at the desired prices, leading to slippage. 

Additionally, regulatory uncertainty poses a risk for decentralized platforms. As governments and regulators struggle to keep up with the rapid growth of blockchain technologies, decentralized prediction markets could face legal challenges or even be banned in certain jurisdictions. 

Conclusion

Decentralized prediction markets offer a revolutionary approach to forecasting events by eliminating intermediaries, enhancing transparency, and reducing transaction costs. Built on blockchain technology, they empower global participation and ensure fairness through smart contracts. 

However, they are not without challenges, such as smart contract vulnerabilities, oracle dependencies, and regulatory uncertainties. While traditional prediction markets face manipulation and centralization risks, decentralized platforms offer an alternative that prioritizes user autonomy and trust.