Prediction Markets

Prediction markets are open markets that use financial incentive mechanisms to forecast specific outcomes. These markets are established for betting on the outcomes of various events. Market prices can reflect the public's perception of the probability of an event occurring.
A typical prediction market contract trades within a range of 0% to 100%. The most common form of prediction market is the binary options market, which has a price of either 0% or 100% at expiration. Users can also sell options before the event occurs, exiting at the market price.
Through prediction markets, we can extract the public's future expectations of an event's outcome from the value expressed by the betting community on that event. Traders with different beliefs reflect their confidence in possible outcomes through trading contracts, and the market prices of these contracts are considered a summary of beliefs.
The history of prediction markets is long, almost as long as the history of human gambling, and the combination of prediction markets and politics seems to have existed since ancient times: in the Middle Ages, people were keen to bet on predictions for the election of the Catholic Pope.
As the U.S. presidential election approaches, interest in political betting surged in July with events such as Trump’s assassination attempt, Biden's withdrawal from the race, and the Democratic Party replacing Harris as a candidate, drawing widespread attention to prediction markets represented by Polymarket.

Polymarket: Order Book Tradable Prediction Market

Polymarket is a decentralized prediction market project that was launched in 2020 by Shayne Coplan, supported by well-known institutions and angel investors such as Polychain Capital, Founders Fund, and Vitalik.
Polymarket allows users to trade on highly controversial topics around the world (such as politics, sports, pop culture, etc.), enabling users to build portfolios based on their predictions.
Unlike traditional sports betting, Polymarket allows users to freely trade shares before the market topics are concluded, enabling speculators to flexibly participate in probability games.

Real-time Hot Markets on Polymarket
Polymarket uses a conditional tokens framework (CTF) based on Gnosis, where for every $1 of collateral in ERC20 tokens like USDC, two conditional tokens are produced, representing the binary outcomes of the event (whether it occurs, yes or no). Multi-outcome markets provide aggregated statistics for multiple binary outcome markets.
Conditional tokens fluctuate in the market due to trading demand, and users can buy and sell them at any time through the order book; alternatively, they can wait until an event has a result, and those holding the correct token will receive the full $1 payout.
Since the two tokens trade independently in a market similar to a centralized exchange (CEX), it is possible for the combined price of the two tokens not to equal $1, necessitating the participation of market makers to balance the price differences. Therefore, before the event concludes, users can always redeem their $1 collateral using one token for and one token against in the contract.

The prediction market on Polymarket generally consists of the following components:

• Market Topic - Each prediction in Polymarket focuses on a single topic or event. Although users can submit new market creation proposals through Polymarket's Discord, Polymarket retains discretion over which markets will be created due to the complexity of wording involved.
• Oracle - The determination of the outcome of an event typically requires human input from an oracle. Polymarket uses the UMA optimistic oracle, which allows anyone to submit solutions. If no one challenges the solution within a certain timeframe, it will be accepted as fact. In rare cases of dispute, the oracle's determination is decided by UMA token holders.
• Conditional Tokens - As mentioned above, by locking $1, users receive two conditional tokens for "yes" and "no." At market settlement, those holding the winning outcome will receive the full $1. The "yes" and "no" tokens trade freely in the market, with prices indicating probabilities. Polymarket uses a conditional tokens framework (CTF) developed by the Gnosis protocol, built on the ERC1155 token standard.
• Order Book Market - Polymarket's market operates a hybrid on-chain order book trading mechanism, similar to dYdX v3, where users authorize through signatures, and operators match trades off-chain, ultimately interacting with contracts on-chain. Settlements are conducted non-custodially by contracts, enabling atomic swaps between binary outcome tokens and collateral assets, so operators do not control the $1 collateral.
• Liquidity Providers - Unlike sports betting, Polymarket allows free trading of conditional tokens before results are announced, with pricing determined by supply and demand rather than mechanisms, leading to potential price discrepancies (where the sum of the two token prices does not equal $1). Therefore, anyone can profit by placing limit orders and earning fees from the bid-ask spread, while Polymarket also provides additional USDC incentives.
  
  Polymarket System Architecture
  Source: https://dune.com/blog/polymarkets-rise-a-new-era-in-prediction-markets
  Polymarket currently has not indicated any plans for token issuance or actively incentivized user points programs. Nevertheless, Polymarket has distributed over $3 million in USDC through its liquidity rewards program this year to incentivize market-making activities, aiming to enhance the overall liquidity depth of the platform. Currently, the highest volume markets pay liquidity providers approximately $600 USDC in rewards daily.

SX Bet: Single-Bet Prediction Platform

SX Bet is a sports betting platform based on Ethereum, founded in 2019, and currently operates on the SX Chain built on Arbitrum Orbit Rollup.
Currently, the betting markets supported by SX Bet primarily focus on sports topics, with bets on the winners of major events in tennis, soccer, baseball, and basketball. Recently, the betting section has also added Crypto, Degen Crypto, and politics, with bets revolving around the price trends of mainstream crypto assets and on-chain meme coins, as well as topics related to the U.S. election winner.
Unlike Polymarket, SX Bet follows the traditional sports betting model, only supporting single bets, and does not allow free trading of bets before the outcome of the predicted event is determined.
SX Bet's innovation lies in its implementation of a combination betting system, where users predict a series of events and can only receive a payout if all predictions are correct. The potential payouts for combination bets are often enormous, which can be seen as leverage in prediction markets. SX Bet's market-making will become the counterparty for trades.
These combination bets are more like lotteries, often yielding returns of up to tens of thousands of times, and their success stories can easily go viral, making them one of the most interesting aspects of traditional sports prediction markets.
Clearly, Polymarket and all prediction markets based on the "dual-token" conditional framework cannot implement combination betting, as contracts cannot mint a conditional token for every possible outcome combination and ensure they can trade freely in a liquid market. The odds in prediction markets with only two outcomes are limited, which may reduce their appeal to users.

Pred X: AI-Powered Topic Prediction Market

Pred X is an initial prediction market based on the Sei blockchain, covering various topics such as politics, cryptocurrency price predictions, and trending events. Currently, the platform supports betting with USDC across multiple blockchains, including Base, Linea, Sei, and Bitlayer, and has launched a corresponding Telegram mini-program. The Telegram mini-program for Pred X is called PredXFun (@PredxFantasyBot), providing users with two modes: one is a game mode where users predict the probability of trending events occurring to earn points; the other is a real mode where users connect their wallets to participate in betting on similar topics on the official website.
Unlike Polymarket, where prediction market topics are primarily proposed by users in Discord, most prediction topics on Pred X are generated by Aimelia AI, which scrapes trending news and market sentiment indices from the internet and automatically generates prediction topics to push to the Pred X website, where users spontaneously form trading markets. Although Pred X supports multiple blockchains, it is not a fully decentralized prediction market application. The prices corresponding to different outcomes of various prediction topics are determined by the platform's centralized order book, while the ordering process and each prediction topic's market are implemented according to smart contract rules.
Objectively, Pred X is still an immature platform compared to other prediction markets. The order book depth and betting transaction volume for predictable topics on the site are far below those of Polymarket and SX Bet. As a prediction market, it should support users in freely trading different outcome tokens before the event is revealed. However, regrettably, the order book of Pred X does not allow users to place their own orders. In the absence of market makers in most markets, users cannot freely trade outcome tokens. Furthermore, the documentation does not detail how to ensure consistency in market contracts across different chains when supporting multi-chain betting, nor how to guarantee sufficient liquidity for all probability outcome tokens across chains. In the "real mode" of the Telegram mini-program, there are discrepancies between the prediction market prices on the same topic and the betting prices on the official website.
These various issues raise doubts about the practical usability and reliability of Pred X. Overall, this product currently resembles a work in progress.

Azuro: Betting Protocol Supported by Liquidity Pools

Azuro is not a prediction market itself but a foundational protocol for creating on-chain prediction markets. This entire set of permissionless infrastructure includes on-chain smart contracts and web components, allowing multiple prediction market applications to be built on Azuro. All platforms based on Azuro can be found at https://azuro.org/ecosystem.
Azuro only allows single bets and does not enable free trading of "yes" and "no" like Polymarket; users can only receive payouts after the results are announced.

Azuro's Role in the Ecosystem
Source: https://gem.azuro.org/hub
Azuro's system is built around liquidity pools, where anyone can deploy their own liquidity pool by interacting with the Azuro factory contract. Multiple betting platforms can be created under one liquidity pool, and each platform can establish multiple possible events for different prediction topics, allowing for separate bets.
In a binary split model like Polymarket, liquidity is isolated and divided among multiple different prediction events. Azuro proposes a concept known as a liquidity tree, where multiple event bets under one prediction topic, or even multiple topics across multiple platforms, can share the same liquidity pool.
The liquidity tree provides a hierarchical structure, with different possible events defining the liquidity range, such as various score possibilities in a soccer match between two teams.
These liquidity funds ensure that the platform can act as a counterparty to pay potential winnings (which would be a loss for liquidity providers) whenever suitable. If bettors generally incur losses, then liquidity providers can earn profits. A liquidity tree simultaneously provides liquidity for multiple prediction topics and acts as a counterparty, generating profits/losses.
The odds for each event under Azuro are calculated based on the funds bet on each event relative to the total liquidity range of the entire prediction topic. The initial odds are set by specific data providers, who also add initial liquidity accordingly. Data providers can adjust the odds during the betting process, with the solvency of these odds guaranteed by the initial liquidity.

Azuro Liquidity Factory System Design
Source: https://gem.azuro.org/contracts/factory
Azuro also supports the implementation of multiple dApp platforms, where betting platforms can set their own fee-sharing, allowing bettors to choose freely; liquidity pool creators can also set the profit-sharing ratio for their pools. A certain percentage of all pool profits will enter Azuro's own DAO, and Azuro has also issued its native token, $AZUR.

Conclusion

The philosophy behind prediction markets is intriguing, as participants aim for profit, viewing the free market as the most effective information-gathering system for predicting real-world events. These outcomes are often surprisingly accurate, and in today's society where recommendation algorithms monopolize information, prediction markets seem to effectively restore truth and reflect opinions, as evidenced by predictions about political timelines on Polymarket.
Many crypto users first encountered prediction markets during the last presidential election with the Trump vs. Biden index launched on FTX, where, combined with SBF's strong market-making capabilities, one could even engage in high-leverage battles. Although centralized, it was indeed a very interesting experience.
Of course, cryptocurrencies have greatly reduced trading friction in prediction markets, providing a better and more efficient market mechanism. Moreover, the ideas based on smart contracts and AMMs have brought better market mechanisms to prediction markets—permissionless access and improved liquidity. Many AI AgentFi projects also view prediction markets as a battleground to leverage collective intelligence and hone their capabilities.
However, the flaws are also quite evident: while Polymarket has opened up the free trading of conditional tokens, it struggles to implement a flexible betting mechanism, lacking the expectation of high returns and losing some enjoyment for ordinary players; while liquidity pool solutions like Azuro are clearly somewhat complex and lack post-betting trading capabilities.
Rather than attributing the current popularity of prediction markets solely to mechanisms and technological innovations, it should be seen as another mass adoption of crypto culture, a victory for the underlying free market culture, which 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 effective than a free market.

References

https://learn.polymarket.com/
https://messari.io/report/yes-or-no-on-polymarket
https://docs.polymarket.com/
https://legacy-docs.polymarket.com/polymarket-+-uma
https://sx.bet/
https://docs.sx.technology/
https://help.sx.bet/en/articles/6233471-parlay-betting-rules
https://predx.ai/
https://predxai.medium.com/
https://azuro.org/#build
https://gem.azuro.org/concepts
https://gem.azuro.org/hub