Prediction Market: Predicting the future through financial incentives

Prediction markets are open trading platforms that use financial incentives to predict the outcomes of specific events. These markets allow people to bet on the possible outcomes of various events. Market prices reflect the overall public judgment of the probability of the event occurring.

The typical trading range for prediction market contracts is between 0% and 100%, with the most common form being binary option markets, where the price at expiration is either 0% or 100%. Users can sell options at market price to exit before the event outcome is revealed.

Through prediction markets, we can extract the public's future expectations regarding a certain event from the betting behavior of participants. Traders with different viewpoints express their confidence in possible outcomes by buying and selling contracts, and the market prices of these contracts are seen as aggregated expectations.

Prediction markets have a long history, almost parallel to the history of human gambling. The combination of prediction markets and politics seems to have a long-standing origin: as early as the Middle Ages, people were keen to predict and bet on the outcomes of papal elections.

As the U.S. presidential election approaches, interest in politically related bets reached a new peak in July, with some prediction market platforms attracting widespread attention.

Polymarket: tradable order book prediction market

Polymarket is a decentralized prediction market project established in 2020, founded by Shayne Coplan, and supported by several well-known institutions and investors.

Polymarket allows users to trade on trending topics in the world such as politics, sports, and pop culture (, and users can build their portfolios based on predictions.

Unlike traditional sports betting, Polymarket allows users to freely trade shares on market topics that have not yet been concluded, enabling speculators to participate flexibly in probability games.

Polymarket uses a conditional token framework, where for every 1 dollar of collateral staked, two conditional tokens are produced, representing the positive and negative sides of the event outcomes. A multi-result market is a comprehensive statistic of multiple binary outcome markets.

Conditional tokens fluctuate in the market due to trading demand, and users can buy and sell at any time through the order book; or wait until the event has a result, where those holding the correct tokens will receive the entire $1 profit.

Because the two tokens trade independently, it is possible for the sum of the prices of the two tokens to not equal 1 dollar, in which case market makers need to participate in arbitrage. Before the event ends, one can also exchange one positive and one negative token back for 1 dollar in collateral.

The prediction market of Polymarket mainly includes the following parts:

• Market Theme: Each prediction focuses on a specific theme or event. While users can submit proposals for new market creations, Polymarket has the discretion over market creation.

• Oracle: Event outcome determination usually requires human input. Polymarket uses UMA optimistic oracles, allowing anyone to submit solutions. If there are no objections, the solution will be accepted. A very small number of disputed cases are decided by UMA token holders.

• Conditional tokens: Lock 1 dollar to obtain "Yes" and "No" conditional tokens. At settlement, the person holding the correct result receives the entire 1 dollar. The two types of tokens are freely traded in the market, with prices reflecting probabilities.

• Order Book Market: Polymarket adopts a hybrid on-chain order book trading mechanism, where operators match orders off-chain after user authorization, and finally interact with contracts on-chain. The contracts undergo non-custodial settlement, and operators do not hold the staked assets.

• Liquidity Providers: Polymarket allows free trading of condition tokens before the results are revealed, with prices potentially deviating based on supply and demand. Anyone can place limit orders to profit from price differences, and Polymarket also offers additional USDC incentives.

Polymarket currently has no token issuance plan and no user points plan. However, this year it has distributed over 3 million USDC in incentives through liquidity rewards to encourage market-making activities, in order to enhance the overall liquidity depth of the platform. The highest volume markets pay liquidity providers approximately 600 USDC in rewards every day.

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SX Bet: Single Bet Prediction Platform

SX Bet is a sports betting platform established in 2019, currently operating on SX Chain.

SX Bet mainly supports betting on sports-related topics, including events like tennis, football, baseball, and basketball. Recently, it has also added sections on cryptocurrencies and politics, covering mainstream crypto assets, on-chain trending coin price movements, and topics related to the US elections.

Unlike Polymarket, SX Bet uses a traditional sports betting model, supporting only single bets, and wagers cannot be freely traded until the outcome of the predicted event is determined.

The innovation of SX Bet lies in the realization of a combination betting system for the first time, where users can predict a series of events and must be correct on all to win a prize. The bonus earnings from combination bets are often very high and can be seen as leverage in the prediction market. As a market maker, SX Bet will become the counterparty.

Combination betting is more like a lottery, offering the potential for massive returns of up to ten thousand times. Successful cases can easily go viral, making it the most attractive aspect of traditional sports prediction markets.

It is clear that prediction markets based on a "dual-token" conditional framework, such as Polymarket, cannot achieve composite betting, as contracts cannot mint conditional tokens for every possible outcome combination while ensuring sufficient liquidity. Prediction markets with only two outcomes have limited odds, which may be insufficiently attractive to users.

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Pred X: Prediction Market Based on AI-Pushed Topics

Pred X is a multi-chain prediction market platform covering various topics such as politics, cryptocurrency price predictions, and popular events. It currently supports betting with USDC on multiple blockchains and has launched a Telegram mini-program.

Unlike Polymarket, where topics are primarily generated based on user proposals, Pred X's prediction topics are mostly automatically generated and pushed to the website by AI, which scrapes trending news and market sentiment indices from the internet, allowing users to spontaneously form a trading market. While it supports multiple chains, it is not a fully decentralized application. The result prices for each prediction topic are determined by a centralized order book on the platform, and the order process and market follow smart contract rules.

Objectively speaking, Pred X is still not as mature compared to other prediction markets. The order book depth and trading volume for predictable topics on the website are far lower than those of Polymarket and SX Bet. As a prediction market, it should allow users to freely trade different outcome tokens before the results are revealed. However, the Pred X order book does not support users placing orders themselves. Most markets lack market makers, making it so that users cannot freely trade outcome tokens.

In addition, the document does not elaborate on how to ensure the consistency of topic market contracts across different chains under multi-chain betting support, as well as how to ensure that all probability outcome tokens have sufficient liquidity on each chain. When the Telegram mini program "Real Mode" connects the wallet for trading, there is a discrepancy between the prediction market for the same topic and the betting prices on the official website.

Various current situations raise doubts about the practicality and reliability of Pred X. Overall, this product currently resembles a semi-finished product.

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Azuro: A betting protocol supported by liquidity pools

Azuro is not a prediction market itself, but rather a foundational protocol for creating on-chain prediction markets. This permissionless infrastructure includes on-chain smart contracts and web components that can be used to establish multiple prediction market applications.

Azuro only supports single bets and cannot freely trade "yes" and "no" like Polymarket; profits can only be obtained after the results are announced.

The Azuro system is centered around liquidity pools, allowing anyone to interact with the Azuro factory contract to deploy their own liquidity pool. Multiple betting platforms can be created under a single liquidity pool, and each platform can establish multiple possible events for betting on different prediction topics.

Azuro proposed the concept of "liquidity tree", where multiple events under a prediction topic, and even multiple topics across different betting platforms, can share the same liquidity pool. The liquidity tree provides a hierarchical structure, delineating the liquidity range for various possible events.

These liquidity funds ensure that the platform can always act as a counterparty to pay potential bonuses for bettors. If bettors generally lose, LP can make a profit. A liquidity tree provides liquidity for multiple prediction topics and acts as a counterparty, generating profit/loss.

The odds for each event in Azuro are calculated based on the ratio of the betting funds for that event to the total liquidity range of the entire prediction market. The initial odds are set by specific data providers and initial liquidity is added. Data providers can also adjust the odds during the betting process, and the payout capacity of these odds is guaranteed by the initial liquidity.

Azuro also supports multiple dapp platforms, allowing the betting platform to set its own commission distribution, and bettors can choose freely; liquidity pool creators can also set the distribution ratio for the pool. A certain percentage of all pool profits is allocated to Azuro's DAO, and Azuro has also issued its native token $AZUR.

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Conclusion

The concept behind prediction markets is fascinating. Participants aim for profit and view the free market as the most effective information gathering system, thereby making predictions about real-world events. These results are often surprisingly accurate. In today’s society where recommendation algorithms dominate the flow of information, prediction markets seem to effectively restore the truth and reflect opinions, as demonstrated in the political event predictions on Polymarket.

Many cryptocurrency users may have first encountered prediction markets through the candidate index launched by a trading platform during the last presidential election. With strong market-making capabilities, users can even engage in high-leverage trading. Although it is a centralized platform, it is indeed a very interesting experience.

Cryptocurrencies have greatly reduced transaction friction in prediction markets, providing better and more efficient market mechanisms. The ideas based on smart contracts and AMM have also brought no barriers to entry and better liquidity to prediction markets. Many AI AgentFi projects even view prediction markets as an arena to leverage collective intelligence and hone abilities.

Of course, the flaws are also evident: although Polymarket has opened up free trading of conditional tokens, it is difficult to implement a flexible betting mechanism, and the lack of high multiple return expectations has also lost the interest of some casual players; while liquidity pool schemes like Azuro are relatively complex and lack the ability to trade again after betting.

Rather than being attributed to mechanisms and technological innovations, the current popularity of prediction markets should be credited to another popular application of crypto culture, a victory for the underlying free market culture. This is particularly valuable in an era where algorithms gradually monopolize information. After all, nothing is smarter than the market, and no information system is more efficient than a free market.

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