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1/ Time for a thread on prediction markets! One of the most fascinating yet poorly understood areas of DeFi, IMHO. Let's explore...
2/ Prediction markets are exchange-traded markets with the purpose of trading on the outcomes of future events. Events can be anything where the results can be objectively verified, like sports games, political elections, horse races, price fluctuations of commodities, etc.
3/ They rely on the collective wisdom and info of a group, and allow participants to place bets on the probability of specific outcomes, where the value of a bet directly reflects the probability of an outcome occurring.
4/ Participants partake in PMs by purchasing and trading contracts, where the value of a contract will vary depending on the outcome of a future event.
5/ There are 3 most common kinds of PMs: 1) Binary (yes or no) 2) Categorical (multiple discreet outcomes) and 3) Scalar (outcome resolves within a given range)
6/ While PMs have gotten a lot of hype in crypto, they're not new. Hollywood Stock Exchange (HSX) was one of the first digital PMs. Founded in '96, it's an entertainment stock market game where movie buffs can predicting the earnings of new movies in their 1st month in theaters.
7/ In '01, brokerage firm Cantor Fitzgerald acquired HSX with the aim of turning it into a real-money exchange. The entire Hollywood establishment (stars, studios, management, theater owners, and distributors alike) hated this idea.
8/ In '09, Hollywood got together and successfully lobbied Congress
into inserting a provision in the financial-reform bill that outlawed movie-futures trading. Too much of a threat! The speculation itself on how a movie would fare could affect real behavior and be damaging.
into inserting a provision in the financial-reform bill that outlawed movie-futures trading. Too much of a threat! The speculation itself on how a movie would fare could affect real behavior and be damaging.
9/ The HSX is still up and running today, but remains merely a simulation of a real-money stock exchange.
10/Founded in '01, Intrade was another online PM. It provided both real-money and fake money trading and allowing users to trade contracts for elections, sports matches, etc. Intrade became the world's leading PM platform during the '08 and '12 US presidential elections.
11/ In '12, Intrade was sued by the CFTC and was forced to block all US users from the real-money markets. In '13, Intrade suspended all trading on the platform citing possible "financial irregularities". For a while after they said they might relaunch, but no dice.
12/.....Annnnnnnd enter decentralized prediction markets! There are a few main platforms: Augur, Gnosis, etc., but @AugurProject seems to be where most of the action is happening right now so I'll focus on that here.
13/ Augur is a trustless, decentralized PM platform built on Ethereum. Its markets follow four stages of progression: creation, trading, reporting, and settlement. Anyone can create a market based on any realworld event and trading begins immediately after market creation.
14/ The outcomes of Augur’s PMs are chosen by users who hold Augur’s native Reputation token (REP), used for reporting and disputing the outcomes of
events. These users stake their REP on the actual observed outcome and receive settlement fees from the markets in return.
events. These users stake their REP on the actual observed outcome and receive settlement fees from the markets in return.
15/ REP plays a central role in Augur’s operations, but is not used to trade in its markets. After the event on which a market is based has occurred, the outcome is determined by Augur’s oracle and traders can close out their positions and collect their payouts.
16/ Prior to Augur, PMs have all been centralized, with trades being aggregated by a central entity that maintains a ledger, determines market outcomes, and distributes payouts to traders. A decentralized network removes many of the risks of selfinterest and corruption.
17/ Augur's contracts are fully automated. Developers do not control how market outcomes resolve, approve or reject trades or other transactions, have the ability to spend funds that are held in escrow, and cannot undo trades or cancel orders.
18/ Augur still has a lot of challenges ahead ( low liquidity across most markets, hard to use UX, etc), so many folks are building on top of it. @veil built on top of Augur to offer a better experience - but recently forked (more here):
19/ One of the toughest issues facing PMs is their murky legal situation: some jurisdictions consider it gambling, while others view is as options trading.
20/ Either way, prediction markets are an interesting way to tap the wisdom of the crowd. And the new decentralized versions are going to be MUCH tougher to shut down than their predecessors. End!
