What Are Prediction Markets?

A prediction market is a speculative market where participants trade based on information rather than traditional financial instruments like stocks or commodities. In these markets, investors bet on the outcomes of future events. For example, they might wager on whether a specific political candidate will win an election or if a new technology will be adopted by a certain date.

Let's consider a simple example: Will a train from the US to Europe be operational by 2025? Investors who believe the train will not be operational can buy "no" contracts, while those who think it will be operational can buy "yes" contracts. The price of these contracts fluctuates between $0 and $1 based on market sentiment and available information.

Blockchain and Prediction Markets

Prediction markets are powerful tools for forecasting and decision-making, but they face limitations in their current centralized form. Centralized platforms are often restricted by local regulations, and users must trust the platform operators while paying additional fees for their services. However, by leveraging blockchain technology, prediction markets can be decentralized, offering several key benefits:

Censorship-Resistance

Traditional prediction markets are typically managed by a single entity, making them vulnerable to shutdowns by government authorities or other powerful actors. In contrast, decentralized prediction markets operate on a blockchain, where they are governed by smart contracts. This decentralized nature makes them much harder to censor or shut down. Smart contracts ensure that the market's rules and operations are transparent and cannot be altered by any single party.

Elimination of Middlemen

Blockchains operate without the need for administrators or intermediaries. In decentralized prediction markets, the tasks usually performed by third parties are handled by automated code. This direct interaction with smart contracts means that users do not have to pay fees to a middleman, reducing overall costs. Additionally, this removes some counterparty risk, as users do not need to trust a central authority to manage their transactions.

Learn more: Blockchain Use Cases: Prediction Markets.