Prediction Market: An Emerging Force in the Encryption Field

A prediction market is an open trading platform that predicts the outcomes of specific events through financial incentive mechanisms. These markets allow people to bet on the possible outcomes of various events. Market prices typically reflect the collective judgment of the public on the probability of an event occurring.

The typical trading range for prediction market contracts is between 0% and 100%. The most common form is the binary options market, where the price at expiration is either 0% or 100%. Users can also sell options at market price before the event occurs.

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

The history of prediction markets can be traced back a long time, as ancient as the history of human gambling. The combination of prediction markets and politics also seems to have a long history: during the medieval period, people were keen on betting predictions on the outcomes of papal elections.

As the U.S. presidential election approaches, interest in betting on political-related topics reached a new peak in July. Various prediction market platforms have therefore garnered widespread attention.

Polymarket: Tradeable Prediction Market

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

Polymarket allows users to trade on various hot topics in the world ( such as politics, sports, pop culture, etc. ) Users can build their investment portfolios based on their predictions.

Unlike traditional sports betting, Polymarket allows users to freely trade shares on market topics that have not yet reached a conclusion, enabling speculators to flexibly participate in probability gaming.

Polymarket employs a mechanism based on a conditional token framework. For every 1 dollar of collateral that a user stakes, two conditional tokens representing the two possible outcomes are generated. These tokens trade independently in the market, with prices fluctuating based on supply and demand.

Users can buy and sell conditional tokens at any time through the order book, or they can wait until the event has a result, at which point the holders of the correct tokens will receive the entire $1 profit. Since the two tokens are traded independently, their combined price may not equal $1, and this is when market makers need to participate to balance the prices.

The prediction market of Polymarket mainly includes the following parts:

• Market Theme: Each prediction focuses on a specific topic or event. While users can submit new market creation proposals, Polymarket has the final say on market creation.

• Oracle: The determination of event outcomes usually requires manual input. Polymarket uses an optimistic oracle mechanism that allows anyone to submit solutions. If there are no objections, the solution will be accepted. In case of disputes, it is decided collectively by token holders.

• Conditional tokens: Locking 1 dollar can obtain conditional tokens representing "yes" and "no" outcomes. When the market settles, holders of the correct outcome token will receive the entire 1 dollar. These two types of tokens trade freely in the market, and their prices reflect the expected probability of the event occurring.

• Order Book Market: Polymarket adopts a hybrid on-chain order book trading mechanism. Users authorize through signatures, and operators match off-chain, ultimately completing transaction settlement on-chain with the contract.

• Liquidity provision: Since trading condition tokens freely is allowed, there may be cases where the sum of the prices of two tokens does not equal 1 dollar. Therefore, anyone can profit from the price difference by placing orders. Polymarket also provides additional incentives to encourage market making.

Polymarket currently has no plans to issue tokens or implement user incentive programs. However, this year it has distributed over $3 million in USDC through a liquidity rewards program to enhance the overall liquidity depth of the platform. The highest volume markets provide approximately 600 USDC in rewards to market makers daily.

SX Bet: Single Bet Prediction Market

SX Bet is a sports betting platform established in 2019, currently running on the SX Chain on Arbitrum Orbit Rollup.

The betting markets supported by SX Bet mainly revolve around sports events, including predictions on the outcomes of major competitions such as tennis, football, baseball, and basketball. Recently, betting on cryptocurrency prices and political topics has also been added.

Unlike Polymarket, SX Bet uses a traditional sports betting model, only supports single bets, and users cannot freely trade their bets before the outcomes of the predicted events are determined.

The innovation of SX Bet lies in its implementation of a combination betting system for the first time. Users can make predictions on a series of events, and only by getting them all correct can they receive the reward. The bonus earnings from combination betting are often quite substantial and can be seen as a leverage mechanism in the prediction market. SX Bet acts as a market maker, becoming the counterparty in the transactions.

This type of combination betting is more like a lottery and can yield huge returns of up to ten thousand times. Successful cases can easily go viral, which is also the most attractive aspect of traditional sports prediction markets.

Clearly, prediction markets like Polymarket that are based on a "dual-token" conditional framework cannot achieve combination betting. This is because contracts cannot mint conditional tokens for every possible outcome combination and ensure sufficient liquidity. Prediction markets with only two outcomes have limited odds, which may not be attractive enough to users.

Pred X: Prediction market based on AI-driven topic suggestions

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 including Base, Linea, Sei, and Bitlayer, and has launched a Telegram mini-program.

Unlike Polymarket, where topics are mainly generated by user proposals, Pred X's prediction topics are mostly automatically generated by an AI system after scraping trending news and market sentiment indices from the internet, and are pushed to the website for users to trade.

Although supporting multiple chains, Pred X is not a fully decentralized application. The different outcomes of the prediction topics correspond to prices determined by the platform's centralized order book, while the order placement process and the markets for each prediction topic are implemented according to smart contract rules.

Objectively speaking, Pred X is still not mature enough compared to other prediction markets. The order book depth and trading volume for predictable topics on the site are far lower than Polymarket and SX Bet. As a prediction market, it should allow users to freely trade tokens for different outcomes before events are revealed. However, the order book of Pred X does not support users placing orders on their own. In the absence of market makers in most markets, users are actually unable to freely trade outcome tokens.

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

Azuro: Bet Protocol Supported by Liquidity Pools

Azuro is not a prediction market itself, but a foundational protocol for creating on-chain prediction markets. This permissionless infrastructure includes on-chain smart contracts and web components, allowing for the establishment of multiple prediction market applications based on Azuro.

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

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

Under binary split models such as Polymarket, liquidity is isolated and scattered across multiple different prediction events. Azuro proposes the concept of a "liquidity tree", where multiple events under a single prediction topic, as well as multiple topics across different betting platforms, can share the same liquidity pool.

The liquidity tree provides a hierarchy, where different possible events define the liquidity range, such as various score possibilities in a football match between two teams.

These liquidity funds ensure that the platform has the ability to act as the counterparty to the bettors at all times, to pay potential rewards ( which is a loss for the LP ). If bettors generally incur losses, then the LP can earn profits. A liquidity tree provides liquidity for multiple prediction topics simultaneously and generates profits/losses as a counterparty.

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

Azuro also supports the implementation of multiple dapp platforms, where the betting platform can set their own fee dividends, and bettors can choose freely; the creators of the liquidity pools can also set the dividend ratio of the pools. A certain percentage of the profits from all pools will enter Azuro's DAO. Azuro has also issued its own native token $AZUR.

Conclusion

The philosophy behind prediction markets is fascinating; it views the free market as humanity's most effective information collection system, predicting the real world through the profit-driven actions of participants. These outcomes are often surprisingly accurate. In contemporary society where recommendation algorithms monopolize information, prediction markets seem to effectively restore the truth and reflect diverse viewpoints, as evidenced by the predictions on political events on Polymarket.

For many encryption users, their first encounter with the prediction market may have been during the last presidential election, when a trading platform launched a candidate index. Coupled with strong market-making capabilities, users could even enable high leverage participation. Although it is centralized, it indeed offers a very interesting experience.

Cryptocurrency has greatly lowered the trading threshold for prediction markets, providing them with better and more efficient market mechanisms. Based on the ideas of smart contracts and automated market makers (AMM), it has also brought better operational mechanisms to prediction markets – no entry barriers and better liquidity. Many AI AgentFi projects even regard prediction markets as an arena to leverage collective intelligence and hone their capabilities.

Of course, the flaws are also obvious: Polymarket, although it has opened up the free trading of conditional tokens themselves, finds it difficult to implement a flexible betting mechanism, lacks the expectation of high returns, and has lost some of the fun for ordinary players; while liquidity pool solutions like Azuro are clearly still somewhat complex and lack the ability for post-bet re-trading.

Rather than being a mechanism and technological innovation, the current popularity of prediction markets should be seen as another popular application of encryption culture, a victory of the free market culture behind it. This is particularly valuable in an era where algorithmic authoritarianism gradually monopolizes information. After all, nothing is smarter than the market, and no information system is more efficient than the free market.