Key takeaways

Decentralized prediction markets let users bet on the outcomes of future events, such as elections and sports competitions, using blockchain technology for transparency and fairness.

Smart contracts and oracles automate transactions and provide real-world data, making these markets efficient and less vulnerable to tampering or external control.

Accessibility and security are major perks of decentralized markets, as they can be accessed from anywhere and are less prone to censorship or hacking than traditional markets.

Risks include market volatility, liquidity issues and reliance on oracles, which, if compromised, could lead to misinformation and financial losses.

Predicting future events is a natural inclination driven by curiosity about what lies ahead. Whether it’s politics, sports or finance, this interest has fueled the rise of prediction markets, where people can bet on the outcomes.

Blockchain technology has enabled the emergence of decentralized prediction markets, which are more efficient and transparent betting platforms. These markets combine the excitement of predicting events with the benefits of decentralization.

This article explores decentralized prediction platforms, what they are, how they work, the technology behind them, how to place a bet and the risks and benefits involved.

What are decentralized prediction markets?

Before diving into decentralized prediction markets, let’s understand traditional prediction markets. Traditional prediction markets are online platforms that allow you to place bets on the outcomes of sports and other events.

In these markets, bets are managed by centralized organizations that make the rules and take a cut of the profits. As a result, they often face trust issues and regional restrictions.

While these platforms involve betting on outcomes, they also aggregate opinions to predict the likelihood of specific events, such as election results, economic indicators or weather events. They serve a dual purpose: betting for profit and gathering data to gauge public sentiment or predict future events.

Decentralized prediction markets operate on blockchain technology, ensuring no single person or group controls the platform. Instead, a distributed network of computers, or nodes, manages its operation.

These markets are globally accessible, allowing participation from anywhere, regardless of geographic location or financial status. The inherent transparency of blockchain also makes it much more difficult for external parties to manipulate or exert undue influence over these markets.

Did you know? The decentralized prediction market Polymarket has handled over $1 billion in trading volume since its launch in 2020.

Centralized vs. decentralized prediction markets

Here’s a table illustrating the major differences between centralized and decentralized prediction markets:

Technologies behind decentralized prediction markets

Crypto prediction markets use technologies such as distributed ledger technology, smart contracts and oracles.

1. Blockchain: Blockchain technology lies at the core of decentralized prediction markets. The distributed ledger keeps track of every transaction made across a computer network. It is decentralized, making it more secure and transparent than centralized systems.
2. Smart contracts: These are self-executing contracts with the terms of the agreement directly written into code. Smart contracts in blockchain prediction markets execute transactions automatically in line with predetermined criteria. For example, if you bet on a political candidate and they win, the smart contract will automatically credit your account with your share of earnings.
3. Oracles: Oracles are crucial in bridging the real world with blockchain technology. In prediction markets, oracles provide essential data, such as the outcome of an event (like the winner of a tournament), allowing smart contracts to function based on accurate and reliable information.

How do decentralized prediction markets work?

Prediction markets operate through smart contracts that encode the terms of the agreement. For example, you might have options like betting on “Team A” or “Team B” in an upcoming baseball tournament. Each choice has a price reflecting the current market consensus.

Suppose shares representing Team A and Team B are trading at 55 cents and 45 cents, respectively. In that case, this pricing suggests the market assigns a 55% probability of Team A winning and a 45% probability for Team B.

You can trade contracts for different outcomes using cryptocurrencies on various platforms. For example, transactions on Polymarket involve fees paid in USD Coin

USDC, while on Augur, fees are paid in Ether ETH

The contract prices vary according to how likely the market perceives each outcome; more probable outcomes are priced higher, while less likely ones are cheaper.

When the event concludes, the market closes, and if your prediction is correct, you receive a payout. Buying a winning contract earlier can lead to a larger payout since prices rise as more people back a particular outcome.

Did you know? Augur’s decentralized prediction market platform has over 1,000 unique markets, ranging from sports outcomes to financial predictions, offering a range of betting options.

How to bet in a decentralized prediction market?

Before learning how to place bets in a decentralized prediction market like Polymarket, let’s first understand some prerequisites, including:

1. Set up a digital wallet: To use Polymarket, you’ll need a digital wallet like MetaMask that supports Ethereum-based transactions and USDC for betting.
2. Purchase and transfer USDC to your wallet: To use Polymarket, buy USDC on a cryptocurrency exchange like Coinbase, Binance or Kraken and then transfer it to your digital wallet. Ensure you have enough USDC to cover your bets and transaction fees.
3. Connect your wallet to Polymarket: Go to the Polymarket website. Click on the wallet icon in the top right corner of the Polymarket homepage, then follow the prompts to connect your wallet.

Once you’re prepared to participate in a decentralized prediction market, follow these steps:

Step 1: Choose a market

1. Browse markets: Look through the available markets on Polymarket. You can find markets related to politics, economics, entertainment, and more using search, sort and filter buttons to narrow your options.
2. Select a market: Click on a market that interests you to view more details, including the question being predicted, current odds and trading history.

Step 2: Purchase shares and place your bet

1. Choose your position: Decide whether you believe the event will happen (Yes) or not (No).
2. Buy shares: Specify the amount of USDC you want to buy shares representing your chosen outcome.

Did you know? Decentralized prediction markets often feature fees ranging from 1–2% of the net earnings from winning positions.

Step 3: Monitor and sell (optional)

1. Monitor market: The value of your shares may change based on the changing beliefs about the event’s outcome. Ensure to watch the market conditions consistently.
2. Sell shares: You can sell your shares back on Polymarket at any time at the current market price.

Step 4: Settlement

1. Event outcome: After the event concludes, the market will settle based on the actual outcome. If the outcome is uncertain, the platform steps in to resolve the issue. On Polymarket, this decision is made by the Market Integrity Committee.
2. Claim winnings: If your prediction is correct, claim your winnings, which will be credited in USDC to your connected wallet.

Benefits of decentralized prediction markets

You might wonder why crypto prediction markets are gaining so much attention. Several key benefits make these markets unique:

1. Transparency: The process is transparent. All transactions are recorded on the blockchain, and thanks to blockchain explorers, the markets are open to scrutiny.
2. Resistance to censorship: Decentralized markets resist censorship, making them accessible anywhere in the world. This democratizes the prediction market space.
3. Democratic set-up: Decentralization means no central authority, and the community collectively maintains the platform. This frees the platform from the whims or biased decisions of the centralized authority and makes the system more democratic.
4. Trust: The open and competitive nature of decentralized prediction markets leads to the participants’ greater trust in the fairness of the platform, which reflects their true sentiment.

Risks of decentralized prediction markets

Decentralized prediction markets come with their own set of risks that you should be aware of:

1. Market volatility: Cryptocurrency markets are known for their volatility, and decentralized prediction markets are no different. Prices can swing wildly, making it difficult to predict outcomes accurately.
2. Liquidity issues: Some markets may suffer from low liquidity, meaning there aren’t enough participants to ensure smooth and fair trading.
3. Regulatory issues: Decentralized prediction markets function in a regulatory space that is still evolving regarding blockchain-based projects. Users may have doubts about the legitimacy of particular markets.
4. Feeding of false information: Decentralized prediction markets depend on oracles to feed information. If an oracle is compromised, hacker(s) may relay false information to the platform, disrupting its functioning.
5. Technological problems: Decentralized prediction markets work on smart contracts. But smart contracts are only as good as the code they are written with. An undetected flaw in the loophole might result in financial loss to the users and the platform.

The future of decentralized prediction platforms

As blockchain technology evolves, expect to see more innovative and diverse applications for decentralized prediction markets. These platforms may offer a broader range of forecasts and more varied marketplaces. Additionally, decentralized prediction markets could integrate with traditional financial systems, providing authorities and researchers with a new tool to gauge sentiment around upcoming events.

User experience on crypto prediction platforms is also likely to improve as the underlying technology advances, making it easier to participate in these markets.

As with any emerging technology, the development of decentralized prediction markets will heavily depend on how regulations evolve.

Disclaimer：

1. This article is reprinted from [cointelegraph]. All copyrights belong to the original author [Guneet Kaur]. If there are objections to this reprint, please contact the Gate Learn team, and they will handle it promptly.
2. Liability Disclaimer: The views and opinions expressed in this article are solely those of the author and do not constitute any investment advice.
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