Prediction markets are open markets that use financial incentives to predict specific outcomes. These markets are established for trading bets on various event outcomes. Market prices can reflect the public’s perception of the probability of an event occurring.
A typical trading range for a prediction market contract is between 0% and 100%. The most common form of prediction market is binary options, where the price at expiration is either 0% or 100%. Users can also sell options before the event occurs and exit at the market price.
Through prediction markets, we can extract the public’s future expectations of an event from the value of the betting group’s performance on the outcome of a particular event. Traders with different beliefs will reflect their confidence in possible outcomes through trading contracts, and the market prices of these contracts are considered aggregated beliefs.
The history of prediction markets is long, almost as long as the history of human gambling, and the combination of prediction markets and politics seems to have existed since ancient times. In the Middle Ages, people were enthusiastic about betting on the prediction of the election of the Catholic Pope.
As the US presidential election approaches, the interest in betting on the political sector reached a new peak in July with events such as Trump’s assassination, Biden’s withdrawal, and the Democratic Party replacing Harris as an elector. Prediction markets represented by Polymarket have attracted widespread attention.
Polymarket: Tradable prediction market with order book
Polymarket is a decentralized prediction market project founded in 2020 by Shayne Coplan, with support from well-known institutions and angel investors such as Polychain Capital, Founders Fund, and Vitalik.
Polymarket allows users to trade on controversial topics in the world (such as politics, sports, pop culture, etc.) and build investment portfolios based on their predictions.
Unlike traditional sports betting, Polymarket allows users to freely trade shares before the market topic is settled, and speculators can flexibly participate in probability games.
Polymarket uses the Gnosis-based Conditional Tokens Framework (CTF), where locking $1 ERC-20 tokens such as USDC generates two conditional tokens representing the positive and negative outcomes of the trade (yes or no). Multi-outcome markets aggregate multiple binary outcome markets.
Conditional tokens fluctuate in the market due to trading demands, and users can buy or sell them through the order book. Alternatively, they can hold the correct tokens until the event has a result and receive the full $1 in profit.
Because the two tokens trade independently in a market similar to a centralized exchange, it is possible that the sum of the two token prices does not equal $1. Therefore, market makers need to participate to balance the price difference. Therefore, it is also possible to use one positive and one negative token to exchange $1 in collateral in the contract at any time before the event ends.
The Polymarket prediction market consists of the following components:
– Market Themes: Each market in Polymarket focuses on a specific theme or event. While users can submit proposals for creating new markets through Polymarket’s Discord, Polymarket has discretion over which markets will be created due to the complexity of wording.
– Oracle: The determination of event outcomes usually requires manual input from an oracle. Polymarket uses the UMA Optimistic Oracle, which allows anyone to submit solutions. If no one challenges the solution within a certain period of time, the solution will be considered as fact. In rare cases of dispute, the oracle’s decision is made by UMA token holders.
– Conditional Tokens: As mentioned above, by locking $1, users obtain two conditional tokens representing “yes” and “no”. At market settlement, the person holding the winning outcome token will receive the full $1. The “yes” and “no” tokens can be freely traded in the market, and their prices indicate the probability. Polymarket uses the Conditional Tokens Framework (CTF) developed by the Gnosis protocol, which is built on the ERC-1155 token standard.
– Order Book Market: Polymarket’s market is a hybrid on-chain order book trading mechanism similar to dYdX v3. Users authorize the operator to match orders off-chain and interact with the contract on-chain through signatures. Settlement is done by the contract in a non-custodial manner, with atomic swaps between binary outcome tokens and collateral assets, so the operator does not hold the $1 collateral.
– Liquidity Providers: Unlike sports betting, Polymarket allows free trading of conditional tokens before the results are determined. The token prices are determined by supply and demand rather than by the mechanism, which may result in deviations (the sum of the two token prices may not equal $1). Therefore, anyone can profit by placing limit orders and taking advantage of the buy/sell spread, and Polymarket also provides additional USDC incentives.
Polymarket’s current token issuance plan has not been announced, and there is no actively incentivized user points program. However, Polymarket has distributed over $3 million USDC through its liquidity rewards program this year to incentivize market-making activities, aiming to improve the overall liquidity depth of the platform. The highest trading volume market currently pays liquidity providers approximately 600 USDC in rewards daily.
SX Bet: Single-bet prediction platform based on AI
SX Bet is a sports betting platform based on Ethereum established in 2019, and the project is currently built on SX Chain, which is based on Arbitrum Orbit Rollup.
Currently, SX Bet primarily supports betting markets in the sports sector, focusing on bets on winners in major events such as tennis, football, baseball, and basketball. Recently, new betting categories have been added, including Crypto, Degen Crypto, and politics, with bets related to the price trends of mainstream crypto assets, on-chain meme coins, and the winners of the US presidential election.
Unlike Polymarket, SX Bet only supports single bets according to the traditional sports betting model, and bets cannot be freely traded until the outcome of the prediction event is determined.
The innovation of SX Bet lies in the first implementation of a system for combination bets, where users make predictions on a series of events and can only receive a bonus if all predictions are correct. The returns from combination bets can be extremely high, which can be seen as leverage in prediction markets. SX Bet’s market-making will become the counterparty for trading.
These types of combination bets are more like lotteries and often bring enormous returns of up to tens of thousands of times, making it easy for viral stories to spread, which is also the most interesting aspect of traditional sports prediction markets.
Obviously, prediction markets like Polymarket and those based on the “two-token” conditional framework cannot achieve combination bets, as it is not feasible for the contract to mint a conditional token for every possible combination of outcomes and ensure that it can be freely traded with sufficient liquidity. Prediction markets with only two outcomes have limited odds and may not be attractive to users.
Pred X: AI-driven pushTopic Prediction Market
Pred X is an initial prediction market based on the Sei blockchain, covering various topics such as politics, cryptocurrency price predictions, and popular events. Currently, the platform supports betting with USDC on multiple blockchains such as Base, Linea, Sei, and Bitlayer, and has launched a corresponding Telegram app. Pred X’s Telegram app is called PredXFun (@PredxFantasyBot), which provides users with two modes: one is a game mode where users predict the probability of hot events and earn points, and the other is a real mode where users can participate in betting on similar topics on the official website by linking their wallets.
Unlike Polymarket, where prediction market topics are mainly proposed and generated by users on Discord, Pred X’s prediction topics are mostly generated by Aimelia AI, which crawls popular news and market sentiment indices from the internet, and automatically pushes them to the Pred X website, where users spontaneously form a trading market. Although Pred X supports multiple blockchains, it is not a completely decentralized prediction market application. The prices corresponding to different outcomes of various prediction topics are determined by the platform’s centralized order book, while the order placement process and the market for each prediction topic are implemented based on smart contract rules.
Objectively speaking, Pred X is still an immature platform compared to other prediction markets. The depth of the order book and the trading volume for predictable topics on the website are much lower than those of Polymarket and Sx Bet. As a prediction market, it should support users to freely trade tokens representing different outcomes before the events are revealed. However, unfortunately, Pred X’s order book does not support users to place orders themselves. In most markets where there is a lack of market makers, users are actually unable to trade tokens representing different outcomes freely. In addition, the documentation does not provide detailed explanations on how to ensure the consistency of topic market contracts on different chains when implementing multi-chain betting support, and how to ensure sufficient liquidity for all probability outcome tokens on various chains. In the “real mode” of the Telegram app, there are discrepancies in the prediction market prices for the same topic compared to the official website.
All these situations raise doubts about the practicality and reliability of Pred X. Overall, this product currently resembles an unfinished product.
Azuro: A Betting Protocol Supported by Liquidity Pools
Azuro is not a prediction market itself, but a basic protocol for creating on-chain prediction markets. This set of permissionless infrastructure includes on-chain smart contracts and web components, and can be used to establish multiple prediction market applications based on Azuro. All Azuro-based betting platforms can be found at https://azuro.org/ecosystem.
Azuro only allows single bets and cannot freely trade “yes” and “no” like Polymarket. It can only earn profits after the results are announced.
Azuro’s system is built around liquidity pools, and anyone can deploy their own liquidity pool by interacting with the Azuro factory contract. Multiple betting platforms can be created under one liquidity pool, and multiple possible events can be established for different prediction topics under each betting platform.
In Polymarket’s binary split model, liquidity is isolated and divided among different prediction events. Azuro proposes a concept called liquidity tree, where multiple events and even multiple prediction platforms under one prediction topic can share the same liquidity pool.
The liquidity tree provides a hierarchical structure, where different possible events define the liquidity range, such as the various possible scores in a football match.
These liquidity funds ensure that the platform has the ability to act as the counterparty to bettors in any suitable situation, to pay potential winnings (which means losses for liquidity providers). If bettors generally lose, liquidity providers can make profits. A liquidity tree provides liquidity for many prediction topics and generates profits/losses as the counterparty.
The odds for each event in Azuro are calculated based on the funds bet on each event and the proportion to the total liquidity range of the prediction topic. The initial odds are set by specific data providers and correspondingly added with initial liquidity. Data providers can also adjust the odds during the betting process, and the ability to pay these odds is guaranteed by the initial liquidity.
Azuro also supports the implementation of multiple dapp platforms. Betting platforms can set their own transaction fees, which bettors can freely choose. The creators of liquidity pools can also set the profit sharing ratio for the pools. A certain proportion of the profits from all pools will enter Azuro’s own DAO, and Azuro has issued its native token $AZUR.
In conclusion
The philosophy behind prediction markets is interesting, as participants aim to profit and view free markets as the most efficient information gathering system for predicting real-world events. These results are often surprisingly accurate. In the current era where algorithmic monopolies dominate information, prediction markets seem to be able to effectively restore the truth and reflect perspectives, as demonstrated in Polymarket’s political event predictions.
For many crypto users, their first encounter with prediction markets may have been during the previous US presidential election with the Trump and Biden indices launched on FTX, where you could even engage in high leverage trading. Although centralized, it was indeed a very interesting experience.
Of course, cryptocurrencies have greatly reduced the transaction friction of prediction markets, providing a better and more efficient market mechanism. Based on the ideas of smart contracts and AMMs, they have also brought better market mechanisms to prediction markets, such as permissionless access and improved liquidity. Many AI AgentFi projects also see prediction markets as a battlefield to harness the collective intelligence of models and sharpen their capabilities.
Of course, the flaws are also evident: Although Polymarket allows free trading of conditional tokens, it is difficult to achieve flexible betting mechanisms and lacks the expectation of high leverage returns, losing some of the fun for ordinary players. The solution of liquidity pools like Azuro is obviously more complex and lacks post-betting trading capabilities.
Rather than mechanisms and technological innovation, the current popularity of prediction markets should be seen as another mass adoption of crypto culture, a victory for the free market culture behind it, which is particularly valuable in the current era where algorithmic authoritarianism increasingly monopolizes information. After all, there is nothing smarter than the market, and no information system is more efficient than a free market.
References:
https://learn.polymarket.com/
https://messari.io/report/yes-or-no-on-polymarket
https://docs.polymarket.com/
https://legacy-docs.polymarket.com/polymarket-+-uma
https://sx.bet/
https://docs.sx.technology/
https://help.sx.bet/en/articles/6233471-parlay-betting-rules
https://predx.ai/
https://predxai.medium.com/
https://azuro.org/#build
https://gem.azuro.org/concepts
https://gem.azuro.org/hub