Prediction Markets

Prediction markets are open markets that use financial incentive mechanisms to predict 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 settles at either 0% or 100%. 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 based on the value expressed by the betting participants regarding the outcome of 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 with politics seems to have existed since ancient times: in the Middle Ages, people were keen on betting on predictions regarding the election of the Catholic Pope.

As the U.S. presidential election approaches, interest in political betting surged in July with events such as the assassination attempt on Trump, Biden's withdrawal from the race, and the Democratic Party replacing Harris as the nominee, leading to widespread attention on prediction markets represented by Polymarket.

Polymarket: Order Book Tradable Prediction Market

Polymarket is a decentralized prediction market project that emerged in 2020, founded by Shayne Coplan, and 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 while the market topic is still undecided, allowing speculators to flexibly participate in probability games.

Real-time Hot Markets on Polymarket

Polymarket utilizes a conditional tokens framework (CTF) based on Gnosis, where each $1 of collateral in ERC-20 tokens like USDC generates two conditional tokens that represent the binary outcomes of the event (whether it occurs or not, yes or no). The multi-outcome market aggregates statistics from 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 the event has a result, with holders of the correct token receiving 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 difference. Therefore, before the event concludes, users can always redeem their $1 collateral using one of each token in the contract.

Polymarket's prediction market 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 events typically requires human input from oracles. Polymarket uses the UMA optimistic oracle, allowing anyone to submit solutions. If no one challenges the solution within a certain timeframe, it will be accepted as fact. In rare cases of disputes, the oracle's determination is decided by UMA token holders.

• Conditional Tokens - As mentioned above, by locking $1, users receive two conditional tokens, "yes" and "no." At market settlement, holders of the winning outcome will receive the full $1. The "yes" and "no" tokens trade freely in the market, with prices indicating probabilities. Polymarket uses the conditional tokens framework (CTF) developed by the Gnosis protocol, which is built on the ERC-1155 token standard.

• Order Book Market - Polymarket's market is a hybrid on-chain order book trading mechanism, similar to dYdX v3, where users authorize trades via signatures, and operators match trades off-chain, ultimately interacting with contracts on-chain. The contracts facilitate non-custodial settlements, allowing for atomic swaps between binary outcome tokens and collateral assets, meaning operators do not hold the $1 collateral.

• Liquidity Providers - Unlike sports betting, Polymarket allows for free trading of conditional tokens before outcomes are determined, with pricing driven by supply and demand rather than mechanisms. Token prices may deviate (the sum of the two token prices may not equal $1). Therefore, anyone can place limit orders to profit from the bid-ask spread, and Polymarket also offers 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 and does not actively incentivize users through a points program. 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, football, baseball, and basketball. Recently, the betting section has also added categories for Crypto, Degen Crypto, and politics, with bets revolving around the price trends of mainstream crypto assets, meme coins, and the winners of the U.S. elections.

Unlike Polymarket, SX Bet follows the traditional sports betting model and only supports single bets, meaning users cannot freely trade their bets until 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 win the prize 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 serve as the counterparty for trades.

These combination bets resemble 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 while ensuring they can trade freely with sufficient liquidity. 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 popular 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 Pred X Telegram mini-program, named PredXFun (@PredxFantasyBot), offers users two modes: one is a game mode where users predict the probability of hot events occurring to earn points; the other is a real mode where users can 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, automatically generating prediction topics that are then pushed 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 speaking, 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 website 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, Pred X's order book does not allow users to place their own orders. In the absence of market makers in most markets, users cannot freely trade outcome tokens. Additionally, the documentation does not detail how to ensure consistency across topic market contracts on 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 and the betting prices on the official website for the same topic.

These circumstances 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. You can find all platforms based on Azuro at https://azuro.org/ecosystem.

Azuro only allows for single bets and does not enable free trading of "yes" and "no" like Polymarket; users can only receive payouts after the results are announced.

The Role of Azuro in the Ecosystem, Source: https://gem.azuro.org/hub

Azuro's system is built around liquidity pools, where anyone can interact with the Azuro factory contract to deploy their own liquidity pool. Multiple betting platforms can be created under a single liquidity pool, and each platform can establish multiple possible events for different prediction topics.

In binary split models like Polymarket, liquidity is isolated and fragmented across multiple different prediction events. Azuro proposes a concept called a liquidity tree, where multiple events under a single prediction topic, or even multiple topics across multiple platforms, can share the same liquidity pool.

The liquidity tree provides a hierarchical structure, delineating the liquidity range for various possible events, such as multiple score possibilities for a football match between two teams.

These liquidity funds ensure that the platform can act as a counterparty for bettors, capable of paying potential prizes (which would be losses for liquidity providers). 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 wagered 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 payout capability 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, allowing betting platforms to set their own fee-sharing ratios, which bettors can choose freely; liquidity pool creators can also set the profit-sharing ratios for their pools. A certain percentage of the profits from all pools 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 dominate information, prediction markets seem to effectively restore truth and reflect opinions, as evidenced by predictions about political events on Polymarket.

Many crypto users first encountered prediction markets during the last presidential election with the Trump vs. Biden index launched on FTX, combined with SBF's powerful market-making capabilities, allowing for high-leverage trading. Although centralized, it was indeed a very interesting experience.

Of course, cryptocurrencies have significantly 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 improved market mechanisms to prediction markets—permissionless access and better liquidity. Many AI AgentFi projects also view prediction markets as battlegrounds for leveraging collective intelligence and honing capabilities.

However, the flaws are also quite apparent: 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 evidently complex and lack post-betting trading capabilities.

Rather than focusing solely on mechanisms and technological innovations, the current popularity of prediction markets should be seen as another instance of mass adoption of crypto culture and a victory for the underlying free market culture, which is particularly valuable in an era where algorithmic authoritarianism increasingly 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