The Current State of Crypto Prediction Markets & A Glimpse into the Futarchy
Prediction markets are not a new concept by any means. However, like many pre-existing paradigms and constructs, it has the potential to be (and is being) disrupted by decentralized networks and cryptocurrencies. This has implications for their operation, as well as forms of governance.
A prediction market is a form of gambling, and the outcomes gambled upon are real-world events, or the likelihood of an event occurring. The reason why they have drawn so much interest is that they tend to be pretty accurate.
A Gentle Introduction to Prediction Markets
Predictions are usually based on a binary event, such as a coinflip, where an outcome can only be A or B. True or False. Each outcome has a share price, between $0.01 and $0.99. Each contract has an expiry date, and upon this date holders of a winning share receive a payoff of $1, while losers receive a payout of $0. Once a share is purchased, it does not have to be held until expiry and can be traded continuously.
Thus, it is a zero-sum game and the higher the price of A, the lower that of B.
A trader’s counterparty is not the house or a broker, but another trader who buys the reverse outcome. The prices of these shares rise and fall according to the laws of supply and demand. The more likely an event seems, the more demand it garners, and therefore the more its price increases.
