“Today’s most influential futurists aren’t individuals but prediction markets, where the collective wisdom of the crowd converges into precise probabilities…”

—The Economist, The Future of Futurology

Key Insights

• Reviews the history and evolution of prediction markets, highlighting recent head-to-head developments between crypto prediction markets and traditional counterparts.
• Explores crypto prediction markets’ transformative potential and operational structure based on their economic principles and functional conditions.
• Analyzes crypto prediction markets’ current status and competitive landscape, featuring both established and innovative projects.
• Provides a forward-looking perspective on the future of crypto prediction markets, the challenges they face, and emerging trends.

Understanding Prediction Markets

A prediction market is a unique type of marketplace where participants trade contracts based on uncertain future events. These tradable events (or propositions) cover many areas, including politics, economics, entertainment, science and technology, and legal matters.

Prediction markets primarily serve two functions: price revelation and information discovery. Prices in prediction markets reflect the timely, high-quality consensus of participants on the traded proposition. Market incentives encourage traders to use reliable information and continuously seek new insights. When properly designed, prediction markets provide information supporting business and political decisions, policy analysis, and military intelligence, enhancing decision accuracy through collective wisdom.

In addition to their informational value, prediction markets also offer entertainment and risk-hedging functions in some cases. For example, prediction markets allow participants to enjoy forecasting outcomes in elections, sports events, and award ceremonies. Likewise, a farmer concerned about drought affecting their wheat harvest can buy contracts for low rainfall. If a drought occurs, the prediction market payout can help offset their income loss.

Prediction Market Prehistory

The earliest modern prediction market, the Iowa Electronic Markets (IEM), was established in 1988 and remains operational today. Initially, the IEM primarily dealt with politics and elections, later expanding into other areas and themes like health and flu predictions. Since its inception, the IEM has accurately predicted every U.S. presidential election outcome, with accuracy far surpassing that of political analysts and opinion polls. Notably, the IEM is a nonprofit platform operated by the University of Iowa’s Business School.

The success of the IEM brought widespread attention to prediction markets. Certain events in the late 20th and early 21st centuries further fueled its popularity and development. For instance, Harvard Business Review and other reputable media outlets covered prediction markets in-depth, increasing public awareness of the concept and facilitating its application within companies. In 2003, the U.S. Department of Defense revealed a prediction market-based plan—FutureMAP. Though it never launched, the attention it drew helped spread prediction markets and fueled related theoretical studies. In 2004, the bestselling book The Wisdom of Crowds by James Surowiecki used prediction markets as an example to showcase the ability of group judgment, encouraging businesses to establish prediction markets. In 2007, dozens of prominent economists jointly urged the U.S. government to reduce legal barriers, promoting the development of prediction markets to enhance decision-making in public and private sectors. These factors collectively accelerated the growth of prediction markets.

In the past 20 years, commercial prediction markets have rapidly developed, giving rise to many public-facing markets. Betfair, launched in 2000, is now the world’s largest online prediction market, though it is closed to users in the U.S. and China. Betfair’s market cap is 4 billion pounds, with annual revenue of 750 million pounds. In addition to betting markets, it offers a range of gaming products, including casino games, arcade games, poker, and bingo. Intrade was once a global leader in prediction markets, offering trading contracts on almost every domain except sports. Unfortunately, due to a lawsuit by the U.S. CFTC, Intrade suspended all trading in March 2013 and closed completely in 2014. Inkling and Lumenogic previously established several notable prediction markets but now focus on providing internal prediction markets and collective intelligence solutions for corporations with many high-profile clients. The Hollywood Stock Exchange (HSX) specializes in entertainment trading, earning substantial fame for predicting box office results and entertainment events. However, HSX is a simulated market that only allows virtual currency transactions. Founded in 2014, PredictIt obtained a no-action letter from the CFTC, focusing on trading related to political and financial events. In 2022, however, the CFTC withdrew PredictIt’s no-action letter, ordering it to cease operations. PredictIt’s supporters filed a lawsuit, and the Fifth Circuit Court temporarily blocked the withdrawal. In 2020, Kalshi received official CFTC approval, becoming a legally sanctioned event contract trading market. This approval marked an important recognition of the legality of prediction markets, as Kalshi can offer a range of event-based contracts covering politics, economics, and more. However, Kalshi’s application for a U.S. election prediction market in 2023 was blocked by the CFTC.

Currently, the regulatory environment remains a primary external challenge to the development of prediction markets. Since prediction markets are regarded as gambling in some jurisdictions, many countries, including the U.S. and China, have imposed strict regulatory measures or outright bans.

Blockchain’s New Era for Prediction Markets

The advent of blockchain technology has made the creation of decentralized prediction markets possible, enabling markets to operate independently of any single party or operator. Typically, these markets use smart contracts to mediate bets between traders and oracles to determine final outcomes. Subsequent chapters will analyze blockchain’s transformative potential in prediction markets further. This section will first focus on the recent remarkable performance of crypto prediction markets.

Rapid Growth of Crypto Prediction Markets

According to CoinGecko, crypto prediction markets saw robust growth in the third quarter, with a growth rate of 565.4%. Total trading volume in the top three prediction markets reached $3.1 billion in Q3, a significant increase from $466.3 million in Q2. Polymarket was the main contributor to this recent explosive growth, accounting for 99% of the market share in September. The platform saw a 713.2% increase in betting volume and an 848.5% increase in trading volume.

Polymarket’s recent success is primarily driven by events related to the 2024 U.S. presidential election. For example, Polymarket gained credibility by accurately predicting Biden’s potential withdrawal from the race, drawing in a large user base. The platform’s real-time odds tracking has influenced public perceptions of candidates’ viability, attracting media attention and creating a feedback loop that has boosted its popularity. Overall, Polymarket has achieved remarkable success through keen market responsiveness and compelling market narratives.

Polymarket’s growth continued into October. By mid-month, the cumulative monthly trading volume reached $900 million, with nearly 89,000 active monthly users, open interest of $160 million, and 88,000 new users.

Gaining Market Share from Traditional Platforms

The chart below compares Polymarket’s popularity with two established platforms, PredictIt and Betfair. Since Polymarket launched in 2020, only data from the past five years are shown.

From this chart:

• Betfair, with a vast user base, wide market coverage, and diverse trading options across various event types, has maintained a dominant position among the three platforms.
• During key political events, such as the U.S. presidential election in November 2020, the midterm election in November 2022, and the upcoming 2024 presidential election, all three prediction markets experienced significant spikes in search volume, reflecting the surge in user engagement and trust in these platforms as reliable information sources.
• Since June 2024, Polymarket has shown signs of overtaking its competitors, with current search popularity even surpassing that of the long-established Betfair. Notably, during Polymarket’s recent period of explosive growth, Betfair and PredictIt’s search popularity has declined, possibly indicating that Polymarket is encroaching on traditional market share.

In addition to search trends, Polymarket’s market share in the presidential election prediction market significantly surpasses traditional prediction platforms, marking a major success for Web3 applications.

PredictIt data is estimated.

Principles and Mechanisms of Prediction Markets

Economic Foundations

Prediction markets operate effectively based on several core economic principles:

• Information Aggregation in Markets: Economist Friedrich Hayek proposed that market prices could aggregate dispersed information from individuals. Through trading, these individuals express their expectations, forming prices that serve as tools for information gathering.
• Efficient Market Hypothesis (EMH): EMH suggests that market prices incorporate all available information. Prices may reflect past values, public information, or even insider knowledge depending on efficiency levels.
• Rational Expectations Theory: Lucas’ theory of rational expectations explains how markets reflect collective expectations. Experimental economists have verified this by showing that markets can accurately predict uncertain outcomes.
• Theory of Collective Intelligence: James Surowiecki proposed that, given conditions of diversity, independence, and decentralization, a group of independent individuals can make predictions that are more accurate than any individual within the group.

These theories collectively explain why prediction markets serve as effective tools for information aggregation and decision-making. Naturally, prediction markets require a set of conditions to operate effectively:

• Significance of Propositions: The predicted event must be sufficiently significant to attract traders.
• Market Liquidity: Markets must have adequate liquidity to ensure smooth trading.
• Divergence of Opinions: There should be a noticeable divergence of opinions among participants to stimulate effective market predictions.
• Measurable Outcomes: The outcome must be accurately measurable for validation and evaluation.
• Informed Traders: There should be participants with insider knowledge to improve the accuracy of predictions.
• Incentive Mechanism: Traders must be sufficiently incentivized to actively participate in the market.
• Trade Anonymity: Ensuring anonymity can reduce potential social pressure and influence.
• Price Transparency: The market should promptly display prices to facilitate participant decision-making.
• Legal Compliance: Market activities must operate within a legal framework to avoid legal risks.

The following section will discuss how blockchain technology enhances prediction markets in aspects such as liquidity, opinion diversity, informed traders, incentives, trade anonymity, and price transparency.

Potential of Blockchain

Blockchain technology has the potential to transform traditional prediction markets. Its features of decentralization, transparency, low entry barriers, pseudonymity, and incentivization can significantly drive their operation.

First, decentralization may allow prediction markets to operate independently of intermediary institutions, reducing manipulation risks and providing a fairer environment for users. Second, blockchain’s transparent ledger records all transaction information, enhancing price transparency and making the process more transparent and trustworthy. Furthermore, blockchain lowers entry barriers, theoretically allowing anyone to participate. This democratization broadens the range of participants and brings more diverse opinions and information sources, thus increasing the likelihood of opinion divergence. Additionally, blockchain offers pseudonymity, concealing participants’ real identities, thereby protecting user privacy and facilitating trade anonymity to some extent.

Blockchain and cryptocurrencies can also significantly enhance prediction market incentives, making it easier for participants to receive rewards transparently and with lower risk. Smart contracts can automatically execute instant payments and reward distributions, ensuring efficient and fair incentivization. Cryptocurrencies support low-cost micropayments, attracting a wider variety of participants. Cryptocurrency-based incentives allow for personalized reward rules based on user contributions. Many markets also issue their tokens, offering short-term gains as well as long-term benefits for token holders. Additionally, cryptocurrency’s global borderless nature allows users to participate without cross-border payment issues, while the transparent ledger ensures open and credible reward distribution. These advantages jointly inject strong motivation into prediction markets, enhancing prediction accuracy and market vitality.

With these factors working together, crypto prediction markets are more likely to attract informed traders with diverse perspectives, thereby improving market liquidity. Consequently, blockchain prediction markets may create a larger data pool through collective intelligence, potentially leading to more accurate predictions.

Despite the challenges faced by crypto prediction markets, such as blockchain scalability, regulatory compliance, and potential speculative behavior among users, blockchain technology offers a disruptive transformation to prediction markets. It will likely drive prediction markets toward greater transparency, efficiency, and fairness in the future.

Models of Prediction Markets

• Continuous Double Auction: Similar to stock markets, buyers and sellers can trade based on the probability of an event occurring, with prices fluctuating based on the event’s likelihood. Exchanges need to maintain ledgers and eventually distribute profits to holders of bets. Most prediction markets use this model.
• Automated Market Maker: This model provides liquidity for under-supplied markets, where the operator acts as the counterparty, similar to a “house” in a casino. The system adjusts the bet proportions of each outcome to balance the market, which is commonly used in sports betting.
• Simulated Market: In regions with gambling restrictions, markets use virtual tokens or rankings instead of money for trading, incentivizing participants through prizes. This allows legal operation while offering users a low-risk platform.
• Other Models: Other approaches include public opinion polling or no-reward betting, which use non-monetary incentives to gather public predictions. While convenient, these methods lack economic incentives.

These models help prediction markets operate in different environments, providing flexible mechanisms for trading and forecasting.

Main Operating Mechanisms

The following section introduces the general operating mechanism of crypto prediction markets as a case study.

Market Creation and Event Selection
In a prediction market, users can create a market (also known as an event) and define a prediction question. For instance, a market might set the question: “Will a certain candidate win the presidential election?” The creator needs to set possible outcomes (e.g., “Yes” or “No”) and define the event’s end time. Different markets can cover a wide range of topics, from politics and sports to finance and weather.

Smart Contract-Driven Operations
Blockchain-based prediction markets are driven by smart contracts. Smart contracts are self-executing codes that ensure complete transparency and immutability in market rules and fund management. Each prediction market typically has a smart contract that defines:

• Market Rules: How participants place bets when betting ends, and how outcomes are determined.
• Betting Pool: Stores all participant funds and automatically distributes funds based on prediction results at the market’s conclusion.
• Market Closure and Settlement: The contract distributes rewards based on the results after an event.

Betting and Token Mechanism
Users participate in prediction markets by placing bets, typically using cryptocurrencies (such as Ether or stablecoins) as betting funds. Bets represent a user’s confidence in a particular outcome, and the tokens used for betting are often tradable assets on the blockchain. Users buy “shares” of an event outcome, with share prices dynamically changing based on market supply and demand.

• Share Prices: Reflects the collective probability assessment by market participants of a particular outcome. For example, if the market believes an outcome has a 70% chance of occurring, the share price might approximate 0.7 (or 70%).
• Liquidity: The market can maintain price liquidity through an Automated Market Maker (AMM) model or an order book model, allowing users to buy and sell shares anytime before the event occurs.

For example, Augur’s AMM mechanism is based on the constant product formula (x∗y=k), where “x” and “y” represent the number of tokens (shares) for “Yes” and “No” outcomes, respectively, and “k” is a constant. This design ensures that regardless of the option chosen by a user, the price will dynamically adjust based on the remaining token quantity. Assuming the initial token amounts for “Yes” and “No” options are both 100, the product of x and y (k) is 10,000. When a user buys the “Yes” option, the number of “Yes” tokens decreases, while the number of “No” tokens increases to maintain the constant k. This causes the “Yes” token price to rise and vice versa.

Polymarket, on the other hand, uses an order book model, operating on Gnosis’s Conditional Token Framework (CTF). Every $1 USDC staked generates two conditional tokens representing “Yes” and “No” outcomes for the event. These tokens are traded in the market based on demand, and users can buy or sell them using the order book or wait for the event outcome. If the prediction is correct, holders receive $1 in rewards. Since the two tokens are traded independently, their combined prices may deviate from $1, prompting market makers to adjust prices through arbitrage. Additionally, users can redeem a pair of “Yes-No” tokens for the initial $1 stake at any time.

Decentralized Oracles
In blockchain prediction markets, oracles provide external data on event outcomes. Since the blockchain itself cannot access real-world data, oracles securely submit the event results to the blockchain.
Oracles may be decentralized, community-driven, or rely on trusted third-party data providers to verify event results. Decentralized oracles can use voting, arbitration mechanisms, or dispute resolution protocols to determine results and prevent tampering.

Market Settlement and Fund Distribution
When the event concludes, and the result is verified, the smart contract automatically distributes rewards based on the bets placed. Participants who placed correct predictions receive rewards proportionate to the total bet pool. Typically, funds are distributed as follows:

• Participants with correct predictions receive rewards.
• Market creators may receive a small fee as compensation.
• A portion of the funds may be allocated as rewards for liquidity providers.

Overview of Crypto Prediction Markets

Development Status

Since the launch of Augur in 2014, prediction markets have been viewed as a standout application of blockchain technology. Although Augur V1, released in 2018, briefly became one of the most popular decentralized applications, it gradually lost momentum. In the second half of 2020, with the arrival of a new bull market and the emergence of new projects like Polymarket, crypto prediction markets experienced renewed growth. However, market activity declined again with the 2022 bear market. During the last bull-bear cycle, the total value locked (TVL) in crypto prediction markets remained between $20 million and $40 million. Entering 2024, the Ethereum ETF and the U.S. election have brought unprecedented opportunities for prediction markets, spurring rapid growth in TVL and trading volume, especially as the election approaches in the latter half of the year. According to Defillama data, as of October 20, 2024, the TVL of prediction markets has reached $247 million, a sixfold increase from $35 million at the beginning of the year.

Despite the recent attention, the scale of prediction markets remains relatively small compared to DEXs and derivatives markets.

Defillama lists 58 prediction market projects but in terms of TVL, the top five projects account for 96% of the total TVL. The leading project, Polymarket, alone makes up 86% of the total.

According to CoinGecko data, the total market capitalization of tokens in the prediction market category is around $540 million. Of this, Gnosis has a market cap of $480 million, and among other projects, only SX Network, Azuro, and Kleros have market caps exceeding $10 million. With the growing popularity of prediction markets, more projects are expected to launch their tokens, with Polymarket’s token issuance plan drawing particular attention.

Representative Projects

The following introduces five representative projects, including TVL’s top four: Polymarket, Azuro, Predict.fun, and Gnosis, as well as SX Network, which ranks second in secondary market capitalization.

Polymarket

Launched in 2020, Polymarket is based on the Ethereum and Polygon blockchains. Utilizing Polygon’s scalability and low transaction costs, it allows users to bet on real-world events using the USD stablecoin (USDC). Polymarket covers various topics, with users able to suggest new markets on Discord, though the final decision on market creation lies with Polymarket. Its oracle system uses UMA’s Optimistic Oracle to determine event outcomes.

Advantages

• Capital and Influential Support: Backed by $70 million in investment from notable investors, including Founders Fund and Vitalik Buterin.
• Technical Innovation: Polymarket employs a hybrid on-chain order book trading mechanism, enhancing transaction efficiency.
• Liquidity Incentives: Ensures market liquidity and reduces price slippage through trading fees and liquidity provider incentives.
• Diverse Market Themes: Expands beyond political events to cover topics like the Super Bowl and Federal Reserve meetings, which have attracted nearly $200 million in trading volume.
• Open-Source Protocol: Introduced the p2p lending protocol PolyLend, encouraging community-driven innovation, and potentially improving capital efficiency and market liquidity.
• First-Mover Advantage: By capitalizing on the U.S. election theme, Polymarket has become the most successful crypto prediction market, gaining substantial attention and traffic, which could provide a lasting advantage.

Challenges and Limitations

• Restricted Growth: Fined by the CFTC for operating without authorization in the U.S., the platform had to block U.S. users, limiting its market size.
• Regulatory Risks: Recent allegations of market manipulation, where certain accounts may have influenced odds to shape perceptions of candidates, could attract further scrutiny from U.S. regulators.
• Market Concentration: Currently, most trading volume is concentrated on U.S. political events, and this reliance could lead to market instability.
• Lack of Token Incentives: With no clear token issuance plan, this could affect user participation and liquidity.

Polymarket showcases innovation and potential within decentralized prediction markets. Despite facing challenges, its first-mover advantage and diversified market strategy may support its future growth.

Azuro

Azuro is an on-chain prediction market infrastructure protocol offering permissionless infrastructure, including smart contracts and web components that enable users to create and participate in multiple prediction market applications. Unlike traditional models, Azuro adopts a liquidity pool structure, allowing different events to share the same liquidity pool. Its core functionality focuses on single bets rather than the free trading style of Polymarket. Azuro has processed over $220 million in trading volume, mainly in sports events. Azuro also makes it easy for anyone to create and manage their prediction market applications, lowering barriers to entry and encouraging more developers to join its ecosystem.

Highlights

• Shared Liquidity: An innovative liquidity tree design allows multiple events and themes to share liquidity, enhancing capital efficiency and user experience.
• Lower Regulatory Pressure: As a decentralized protocol focusing on sports betting, Azuro faces fewer regulatory challenges, likely attracting more participants.
• Active User Base: Users exhibit high engagement, with widespread betting, especially on popular sports like soccer and basketball.
• Sustainable Returns: Liquidity providers enjoy an average annual return of over 20%, incentivizing more people to provide liquidity.
• Governance Token $AZUR: Functions as a governance token, adding a gamification layer that enhances user engagement and incentives.

Limitations

• Single Bet Restriction: Azuro only supports single bets, lacking the flexible trading model, which may affect user experience and engagement.
• Market Dependency: Primarily focused on sports markets, Azuro’s competitiveness could decrease if it struggles to expand to other markets.
• Liquidity Risks: Liquidity providers face counterparty risks since the liquidity pool acts as the counterparty in all trades.

Overall, Azuro has an innovative liquidity structure and a strong user base, establishing a leading position in sports betting. However, flexibility and market diversity still need improvement.

Gnosis

Founded in 2015, Gnosis is a comprehensive decentralized finance platform focused on prediction markets, decentralized exchanges, wallet services, and infrastructure tools. It supports prediction markets through the development of the Conditional Token Framework (CTF) and has developed its own Layer 2 solution, Gnosis Chain, to address Ethereum’s scalability and efficiency challenges. The Gnosis token (GNO) is key in governance and staking mechanisms.

Highlights

• Multi-Function Platform: In addition to prediction markets, Gnosis offers decentralized exchanges and various infrastructure tools, meeting diverse user needs.
• Dutch Auction Mechanism: Its unique Dutch auction mechanism provides an innovative approach to event result pricing, enhancing market flexibility.
• Developer Ecosystem: Gnosis has attracted a large community of developers, providing a wealth of development tools and APIs to support application building.

Limitations

• Complexity: Compared to the simplicity of Polymarket, Gnosis’s extensive features and interface may overwhelm new users, reducing accessibility.
• User Base: Despite its wide-ranging features, Gnosis has a relatively small user base, which may impact liquidity and market activity.
• Competitive Pressure: With competitors like Polymarket and Azuro, Gnosis’s market share is decreasing.

As a multifunctional decentralized platform, Gnosis showcases potential in prediction markets and DeFi through its innovative Dutch auction mechanism and strong ecosystem. However, its complexity and smaller user base may limit its broader adoption, necessitating continued efforts to improve user experience and market activity.

Predict fun

Predict.fun is a prediction market platform based on the Blast ecosystem. It allows users to bet on future events in politics, sports, and cryptocurrency. The platform uses the UMA protocol to provide Oracle services and enhances user experience through gamification and accessibility.

Highlights

• Native Yield: Users can earn returns automatically on stablecoins and ETH without transferring assets to other DeFi platforms.
• Diversified Markets: Supports binary and multiple-outcome markets, allowing users to bet on more options, and increasing flexibility.
• User-Friendly: Simplifies the user interface and offers gas-free transactions, lowering participation barriers and attracting new users.

Limitations

• Liquidity Risk: As a new platform, it may initially struggle with liquidity, impacting user experience. Although TVL is currently second only to Polymarket and Azuro, this may be due to short-term launch incentives, with sustainability yet to be seen.
• Price Discovery Limitations: Although users can adjust bets based on market dynamics, limited liquidity, and risk aversion among participants may restrict efficient price discovery.

Predict.fun attempts to attract users through gamification and native yield, showing some innovation, but it faces stiff competition and liquidity challenges.

SX network

Founded in 2019, SX Network, also known as SX Bet, is an Ethereum-based sports betting platform that has since migrated to the SX Chain, built on Arbitrum Orbit Rollup. The platform primarily supports winner bets on sports events, including tennis, soccer, baseball, and basketball, and has recently added bet markets on crypto assets and political events.

Highlights

• Parlay Betting System: SX Bet innovatively offers parlay bets, allowing users to predict multiple events with the chance of winning only if all are correct. This setup provides high returns, similar to traditional lottery gameplay.
• User-Friendly Payment Channels: Supports both traditional payment methods and cryptocurrency deposits, lowering the entry barrier for users.
• High Return Potential: Parlay bets offer attractive returns, appealing to high-risk, high-reward users.

Limitations

• Significant Drop in Liquidity: According to DeFiLlama, SX Network’s TVL has plummeted from over $7 million in November 2022 to only $50,000, indicating a substantial decline in user engagement and attractiveness.
• Lack of Flexibility: Unlike prediction markets like Polymarket, SX Bet does not support the free trading of bets. This prevents users from adjusting or exiting bets before outcomes are determined, which may limit flexibility.

SX Network showcases innovation in sports betting with parlay betting and user-friendly payment channels, but the significant decline in liquidity raises concerns about its future outlook.

Other Noteworthy Projects:

PredX: The first AI-driven prediction market on the SEI chain, PredX uses an AI algorithm engine to recommend events likely to interest users, enhancing the rate of order placement. It also allows KOLs (Key Opinion Leaders) to create events to boost market activity, stimulate trading, and share profits. The team stood out at the 2023 Silicon Valley AI+Web3 Creative Competition, winning first place among over 100 participating teams and has applied for two AI algorithm invention patents.

DexWin: Built on the Azuro protocol, DexWin focuses on delivering an immersive sports betting experience. The platform achieves gas-free transactions, reducing costs for users. DexWin promises the highest betting odds globally, supporting multiple sports, and also offers decentralized casino games, including dice, coin flips, and slots.

Hedgehog Markets: Launched in 2021 by former Google and Oscar Health engineer George Yu, Hedgehog Markets is a decentralized prediction market platform built on the Solana blockchain. Leveraging Solana’s high transaction speed and low fees, it offers a seamless user experience. One of its standout features is the “no-loss market,” which allows users to place bets without risking their initial capital, as funds generate returns through DeFi protocols.

SanR.app: Developed by the Santiment team and operating on the Ethereum blockchain, SanR.app utilizes smart contracts to ensure transparency, aiming to help users identify key trends in the crypto market by analyzing on-chain data and social signals. SanR’s unique feature enables users to monetize their on-chain reputation by posting market analysis signals, incorporating social finance elements, tracking signals from top traders, providing real-time market predictions, and helping users make more informed trading decisions.

Swaye: A decentralized prediction market platform designed to engage users by integrating prediction markets with meme tokens. Unlike Polymarket’s centralized market creation mechanism, Swaye allows users to freely create markets and share predictions via social channels for viral spread. The platform encourages early user participation in betting, which also increases liquidity. Despite currently limited liquidity, users can earn returns up to 112%, suggesting that meme tokens could play an important role in prediction markets.

Summary

Crypto prediction markets grew slowly before 2024, heavily impacted by the cyclical nature of the cryptocurrency market. Currently, prediction markets remain relatively small in scale compared to major DeFi categories. Given that election events currently account for the majority of trading volume in prediction markets, market activity is expected to decline following the election’s conclusion. Consequently, continuously finding new trending topics will be a significant challenge for this sector.

Since the latter half of this year, Polymarket has dominated prediction markets in terms of trading volume and traffic. Although little is expected of its performance after the election, Polymarket has already surpassed Gnosis and Azuro in total value locked (TVL) since 2023. Therefore, we have reason to believe that Polymarket may maintain its competitive edge in the future.

Notably, this field remains in its early stages, and the competitive landscape is not yet fully formed. Overall, Polymarket, Azuro, and Gnosis each have unique advantages in technology and operations, establishing them as primary market leaders. Besides these, there are several other innovative projects worth watching in the market.

As the attention on this field increases, established DeFi platforms may also enter the competition. For example, the dYdX Foundation has announced a perpetual prediction market contract for the 2024 Trump election and plans to introduce more leveraged prediction markets for real-world events, including sports, global elections, and cultural events.

Future Outlook

Broad Market Potential

Advances in technology and the rise of digital natives have driven the rapid growth of the online gambling industry. Although prediction markets are focused on outcome betting, they are fundamentally different from gambling markets: the former is mainly for price discovery and information gathering, while the latter focuses on entertainment. Online sports betting involves betting on events like soccer, basketball, and horse racing, and while often categorized as gambling, sports betting relies on analysis of relevant information and historical data, showcasing aspects of price discovery and information gathering. Therefore, in the context of this report, sports betting is considered part of the prediction market sector.

Unfortunately, the use cases for prediction markets are not yet widely developed, and comprehensive data on existing prediction markets is lacking. Therefore, sports betting data can help provide insight into the future potential of prediction markets. According to Castle Capital and Statista:

• Online gambling market revenue is expected to reach $107.3 billion in 2024, with sports betting accounting for nearly $50 billion.
• Revenue is projected to grow at a compound annual growth rate (CAGR) of 6.47% from 2024 to 2029, reaching $132.9 billion by 2029.
• By 2029, the online gambling market is expected to reach 290.5 million users.
• User penetration is projected to increase from 6.2% in 2024 to 7.7% in 2029.

As previously mentioned, crypto prediction markets have significant advantages in enhancing liquidity, viewpoint diversity, insider trading, incentive mechanisms, trade anonymity, and price transparency, with the potential to replace some traditional prediction markets. Polymarket’s recent success highlights this potential. Azuro, focused on sports betting, has also shown impressive performance, processing over $220 million in prediction market transactions and attracting users betting on various sports events. Although Azuro’s current scale is small compared to traditional online sports betting, this indicates a significant growth opportunity.

As Bitcoin and Ethereum spot ETFs become more mainstream, crypto assets are gaining broader acceptance. With increased popularity, prediction markets can leverage their infrastructure and liquidity pools to drive further market growth. In the future, crypto prediction markets are expected to play a key role in sports betting and broader prediction markets.

Regulatory Constraints Remain a Short-Term Barrier

Prediction markets face the “bucket effect.” Although public awareness of prediction markets’ value in enhancing decision-making in the public and private sectors has grown in the 21st century, compliance has remained a bottleneck for their development. From the history of commercial prediction markets, many popular prediction markets closed due to U.S. regulations, pivoting to providing internal prediction solutions for businesses or exiting the industry entirely. HSX avoided legal risks through a simulated market model, but the lack of economic incentives limits its effectiveness, and simulated markets are unlikely to become the mainstream mode for prediction markets. Betfair, the largest online prediction market, avoids compliance risks by restricting access to major regions like the U.S. and China, thereby sacrificing significant market share. IEM and PredictIt, due to their academic nature, have received exemptions from the CFTC but are still strictly limited in market types and bet sizes. Obtaining formal CFTC approval to become a legal event contract trading market is not only a high-bar process but also faces many restrictions; for example, Kalshi’s recently launched U.S. election prediction market is still under regulatory scrutiny.

Governments sometimes claim to ban prediction markets to protect citizens from gambling risks, but these restrictions could drive individuals to unlicensed operators, exposing users to worse odds, higher fees, and a higher risk of fraud or scams. Unfortunately, it is not easy to change regulatory perspectives. While occasional exemptions and approvals of specific prediction markets indicate that the U.S. regulatory environment is improving, it is unlikely to see substantial changes in the next five years. This means that prediction markets lose a large portion of the global market (notably the U.S. and China) and that prediction markets cannot fully harness the potential of collective intelligence mechanisms.

Although blockchain is decentralized, it has proven challenging to fully realize this in practice. Augur, the most decentralized prediction market, has shown that a decentralized community struggles to effectively promote the market. In the early stages of a project, improving user experience, developing promotional strategies, curating predictive events, and establishing partnerships all require a centralized, professional operational team. Therefore, the presence of an operational entity makes it difficult to entirely avoid oversight.

Thus, regulatory compliance remains an ongoing challenge for crypto prediction markets. Currently, major crypto prediction markets follow Betfair’s approach by avoiding high-risk regulatory regions. This may be a viable strategy, allowing platforms to focus on development instead of regulatory battles. Perhaps when platforms are fully mature and the need for centralized operational teams diminishes, crypto prediction markets can genuinely achieve decentralization and unlock their full potential.

Sustained Market Appeal as a Decisive Success Factor

Election-related markets account for over 80% of trading volume on the Polymarket platform, but U.S. presidential elections are held every four years, with midterm elections in between. Whether Polymarket can expand into other market areas and sustain demand after the election remains to be seen. After attracting repeat users in various sports events, Azuro is also seeking additional market opportunities. Both Azuro and Polymarket plan to broaden their market scope, with Polymarket aiming to reduce its reliance on the U.S. election market and Azuro working to support more political and news events while encouraging more non-sports betting activity.

Recently, Polymarket has seen increased interest from bettors in non-election markets. For example, the Super Bowl champion prediction market has surpassed $100 million in trading volume, while the November Fed meeting’s result reached over $82 million in trading volume. This is a positive signal.

Other crypto prediction markets are also exploring diversified markets. PlotX enables users to predict the prices of various cryptocurrencies, including BTC and ETH, appealing to traders seeking to quickly capitalize on market insights. DexWin, in addition to prediction markets, offers decentralized casino games such as dice, coin flips, and slots, potentially expanding its user base. SanR.app allows users to monetize their on-chain reputation by publishing market analysis signals, allowing traders and data scientists to identify key market signals, filter out irrelevant information, and make informed predictions about future market trends. Swaye allows any user to create markets related to event outcomes, including creating or trading meme tokens tied to those outcomes, offering the potential to significantly expand the diversity and scope of predictable events, covering some unexpected topics and fields.

AI is another potential avenue for expanding the diversity of predictable events and creating trending topics. By analyzing trends in news, social media, and financial data, AI can quickly identify events that resonate with the public, providing engaging and often controversial topics that keep markets dynamic and closely connected to current events. This capability enhances market relevance and appeal. Omen and PredX are exploring applications in this area.

In addition to expanding diversified application scenarios, achieving broad and effective promotion is also essential. For example, allowing users to directly share predictions on social media could further enhance engagement. By leveraging existing social media channels, crypto prediction markets can more effectively reach a broader base of potential users, increase interactivity, and boost market activity and visibility.

Technology and Experience Issues Still Need Improvement

Blockchain technology is still not mature enough, and the entire industry remains exploratory. This creates a series of challenges on the path to mainstream adoption for crypto prediction markets.

First, insufficient liquidity is a major issue, especially in long-tail markets, where low participation often leads to limited market depth, wider bid-ask spreads, and lower prediction accuracy. Low liquidity also makes markets more susceptible to price manipulation by a few large players, impacting market fairness.

Oracle reliability and data accuracy are also crucial issues. Prediction markets rely on oracles to obtain external data, and the accuracy of these oracles directly affects the credibility of market predictions. Unreliable data may lead to incorrect predictions, undermining user trust in the platform.

In terms of user experience, the complexity of decentralized platforms is also a barrier. Managing wallets and handling gas fees can deter users without a technical background, limiting the platform’s reach.

The design of incentive mechanisms and governance structures also poses challenges. Effectively incentivizing participants, liquidity providers, and data providers, while ensuring the efficiency of decentralized governance, remains a challenge in platform management. Decentralized governance models often lead to slow decision-making and can create disputes, affecting overall platform operations.

Industry participants are actively addressing these issues. Many prediction markets are built on low-fee Layer 1 or Layer 2 blockchains to enhance scalability and reduce transaction costs. Polymarket’s introduction of PolyLend will allow users to use leverage, increasing capital flexibility, lowering funding costs, and boosting liquidity within the platform, potentially attracting more sophisticated participants. Azuro’s peer-to-peer model helps distribute risk among liquidity providers and share liquidity. Azuro also allows anyone to quickly launch prediction applications or websites that share Azuro’s liquidity pool, further enhancing market-maker efficiency and improving liquidity. Additionally, Azuro plans to develop smart AI agents through Olas, which will perform specific tasks on its platform. In the future, these AI agents may be able to provide market liquidity and efficiently extract API data from the market.

For crypto prediction markets to gain a larger market share and influence, continuous investment in technology, mechanism innovation, and community building is essential.

Conclusion

The future for prediction markets looks bright, with blockchain and cryptocurrency technology set to make a significant impact. In several niche areas, crypto prediction markets have already outpaced traditional competitors, and the continued mainstream adoption of crypto assets is expected to drive further growth.

Politics and sports remain the two key application areas for prediction markets, with Azuro and Polymarket each filling in gaps in the other’s focus. Other crypto prediction markets are also branching out, exploring diverse areas like cryptocurrency price predictions, decentralized casino games, and market signal predictions. User-generated and AI-driven content is paving the way for greater market diversity. To achieve true success, prediction markets must keep enhancing their relevance and appeal to a broader audience.

Since the regulatory environment is unlikely to change substantially shortly, focusing on development while avoiding high-risk regions—as Betfair has done—could be a practical approach. Eventually, crypto prediction markets may be able to operate without relying on centralized teams, evolving into fully decentralized and censorship-resistant platforms that can unlock the full potential of collective intelligence.

Industry players should continue exploring innovative solutions, integrating the latest technology, optimizing operations and incentives, and designing features that align with user needs. This approach will address challenges like limited liquidity and improve user experience, ultimately transforming the landscape of prediction markets and driving them toward a more robust and dynamic future.

Crypto prediction markets are evolving rapidly. With more diversified market strategies and improvements in technology and user experience, they have the potential to compete with traditional markets on a much broader scale. We look forward to the day when crypto prediction markets achieve true decentralization, tapping into the full potential of collective wisdom.


Reference Links

1. Prediction Markets: Theoretical Basis, Operating Mechanisms, and Applications
2. https://www.brookings.edu/articles/how-betting-platform-predictits-legal-struggle-could-hamper-regulators-and-hurt-regulated-firms/
3. https://www.investopedia.com/terms/p/prediction-market.asp
4. https://ballotpedia.org/Prediction_markets_in_the_2024_presidential_election
5. https://members.delphidigital.io/reports/markets-will-save-the-world#markets-are-all-you-need-6952
6. https://assets.coingecko.com/reports/2024/CoinGecko-2024-Q3-Crypto-Industry-Report.pdf?utm_campaign=2024-q3-crypto-industry-report&utm_source=web&utm_medium=buzz
7. https://betting.betfair.com/politics/us-politics/2024-presidential-election-betting-the-latest-data-from-the-betfair-exchange-040624-6.html
8. https://chronicle.castlecapital.vc/p/evolution-of-prediction-markets
9. https://www.statista.com/outlook/amo/online-gambling/worldwide?utm_source=chronicle.castlecapital.vc&utm_medium=referral&utm_campaign=the-evolution-of-prediction-markets