Prediction Markets - A Primer
About Prediction Markets
A prediction market acts as a decentralized mechanism to aggregate dispersed information, allowing participants to trade contracts whose values depend on the outcomes of uncertain future events. In blockchain-based environments, these markets convert collective beliefs into market prices that closely reflect real world probabilities while ensuring transparency, auditability, and automated enforcement through smart contracts (The Rise of Blockchain-Based Prediction Markets, 2024). Recent theoretical research highlights advancements in decentralized prediction system design, particularly through automated market maker (AMM) models that enhance liquidity, mitigate slippage, and reduce vulnerability to front-running (Wang, 2023).
Within the decentralized finance (DeFi) ecosystem, three key actions define the market lifecycle - definitions are provided below.
Definitions
Create Market
Create Market
Setting up a new prediction market by defining the event, outcomes, resolution criteria, and end date.
Place Bet
Place Bet
Buying a position (shares/contracts) on a specific outcome in a prediction market. You pay the current market price for shares that will be worth $(bet amount) if your prediction is correct, or $0 if wrong.
Close Position
Sell
Closing or transferring your position before the event resolves; locks in profit or loss
Terminate
Ending your exposure before settlement, either by selling, exiting, or platform action. (Given that this is uncommon, it is not mentioned in the article for now)
Settle
Final contract payout when the event is officially resolved; profits/losses are locked in
References
The Rise of Blockchain-Based Prediction Markets. (2024, September). California Management Review. Retrieved from https://cmr.berkeley.edu/2024/09/the-rise-of-blockchain-based-prediction-markets/
Wang, Y. (2023). Automated Market Makers and the Design of Decentralized Prediction Systems. In Lecture Notes in Operations Research and Computational Humanities (pp. 215–229). Springer. Retrieved from https://ideas.repec.org/h/spr/lnopch/978-3-031-18679-0_12.html
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