What Are Prediction Markets in Crypto? 

Prediction markets let users bet on the outcome of ongoing and future events using cryptocurrency. By voting “yes” or “no” to future events, the prediction market determines a price that represents the market’s estimate of the probability of the event occurring.

Prediction markets are generally divided into two main categories: sports and non-sports. The non-sports category, which drives the most volume, encompasses a range of topics including predictions on crypto, politics, and cultural events.

Key Takeaways

• Users bet on future event outcomes using cryptocurrency, buying shares that pay out based on accuracy. Market prices aggregate beliefs into a sentiment barometer.

• Polymarket is the largest prediction market, using USDC stablecoin. Others include, Polymarket, Polkamarkets, Hedgehog Markets, Drift, Limitless, Swaye, Inertia, Zeitgeist, Azuro, Monaco, SX Network, Overtime,  and Manifold Markets.

• These markets incentivize sharing true beliefs through financial commitment. High participation integrates varied views into market-determined probability forecasts.

When can we say we really know what’s going to happen in the future? And if we think we know, are we willing to put those beliefs to the test? Now with prediction markets in crypto, we can. In this article we’ll take a look at prediction markets in crypto, explain the most popular ones, and how we can get started using them.

Prediction Markets In Crypto Explained

Prediction markets in crypto allow you to bet on the outcomes of future events. Topics to take a stance on can range drastically and will often follow the ‘current’ thing, ranging from climate change to political elections or even supernatural events.

For example, the prediction market that was resolved around the Bitcoin approval date – ‘Bitcoin ETF approved by Jan 15?’

People who thought it would be approved before January 15, 2024, bought themselves “Yes” shares for $0.50 meaning they thought there was a 50% chance it would. People who thought this was too early bought a “No” share.

But as we got closer to the date and more bullish signals and news were publicized, more people were convinced the ETF would be approved before the set date. So we saw a rise in price of ‘Yes’ shares and a decline of “No” shares.

With the ETF ultimately being approved on January 11, 2024, the market resolved earlier than expected and anyone who bet on “Yes” and held their shares saw each of their shares become worth $1 immediately. Conversely, any trader who owned “No” shares saw their investment become worthless.

Mechanisms Defining Prediction Markets

There are two primary mechanisms in prediction markets: sometimes referred to as ‘Web2.5’ and ‘Web3’. Web2.5 platforms use cryptocurrency primarily as a payment method, with the backend processes similar to traditional betting platforms.

Web3 prediction markets, on the other hand, leverage aspects of blockchain for enhanced transparency and execution. They utilize smart contracts for bet execution and mechanisms like automated market makers (AMMs) and order books, known from and served on permissionless decentralized finance exchanges.

Oracles also play a crucial role in prediction markets by providing reliable and impartial data needed to resolve market outcomes. In the context of Polymarket, the UMA oracle acts as an arbitrator for market outcomes. The process begins when a market is created on Polymarket using the Gnosis conditional token framework. The market’s resolution is dependent on a specific condition that needs to be verified by an oracle.

What Are the Pay-Outs Mechanisms on Crypto Prediction Markets?

There are two different methods for getting paid out when your bet becomes reality: fixed payout and pari mutuel payout.

Fixed Payout

This is the most straightforward. A fixed payout is like reserving your prize money upfront. When you place your bet, your possible winnings are locked in right away and do not change later on.

For example, if you buy 300 “YES” shares, you will get 300 points if you are right. It’s like putting 300 coins in your piggy bank for a rainy day. The only thing that matters is if your guess is right or wrong – all action after you bet does not affect your payout.

Pari Mutuel Payout

This method pays out by dividing the prize pool between all bettors who won the bet. It’s a prize pool where all winning players get their fair share. The more people who win, the smaller each prize will be. The fewer winners, the bigger your share.

Both have advantages and disadvantages – fixed payout ensures knowing your return, while parimutuel could turn in your favor if you take the contrarian side of a bet and win.

History of Prediction Markets in Crypto

Prediction markets are not a new concept in crypto. In 2020, the now-collapsed FTX exchange introduced a similar type of market where users could bet on future events like elections and token prices.

One of the notable examples was the “TRUMP2024” market that centered around whether Donald Trump would run for president again in 2024. Participants could buy (long) or sell (short) contract tokens representing each outcome – if Trump ran, the tokens expired to $1, and if not, became worthless at $0.

Essentially, these “bets” involved going long or short on future contract tokens. However, current prediction markets differentiate in that traders purchase outcome shares rather than going long or short. 

Unfortunately, with the bankruptcy of FTX, the TRUMP2024 market will never be settled (on FTX). Another reminder how centralization could pose risks to participants just wanting to bet. 

The Significance of Crypto in Prediction Markets

While traditional markets normally only use fiat currency, prediction markets in crypto are unique in their use of cryptocurrency for both placing bets and collecting payouts.

The cryptocurrencies used are stablecoins that are perfectly suited for this purpose. Foremost, the transparency of the blockchain ledger allows full visibility and takes away doubts that users are betting against an opaque third party “house”.

Additionally, these stablecoins remain stable and are under the self-custody of each user. Users will only interact through smart contracts and will not deposit cryptocurrencies into a centralized wallet. Lastly, the decentralized nature of crypto makes it possible for anyone from anywhere in the world to use the market, regardless of their location, except for restricted countries.

Some well-known crypto prediction markets we will explore are separated into non-sports and sports prediction markets. Let’s take a look at crypto prediction markets that focus on more than just sports. The projects in the list below are listed in order of the size of their X (Twitter) following: 

Polymarket: Largest Prediction Market Powered By Crypto

Polymarket is the largest and most popular prediction market in the crypto space. It has the highest liquidity and is most frequently quoted on Crypto Twitter. Polymarket allows its users to access the prediction markets through USDC, a stablecoin 1:1 pegged to the dollar.

Sadly, due to regulatory issues Polymarket is forbidden from letting U.S. citizens trade on its platform. However, people of the U.S. can still view information on the markets.

How Does Polymarket Work?

Just as explained in the previous section, the price or odds represent the current probability of an event occurring according to the market assessment.

For example: In a prediction market on whether Sam Bankman Fried, the former FTX CEO, will be sentenced to 50+ years in federal prison or not, the “Yes” shares trading at 31c indicate that the market thinks there is a 31% chance that he will.

The ultimate outcome of whether SBF is sentenced to 50 or more years in prison will be known by 11:59 PM ET on June 30, 2024.

If traders betting “Yes” are right, this means SBF gets a hard sentence of 50+ years, and each “Yes” share would be worth $1. That’s a 69c profit per 31c share price. Any trader who owned “No” shares would see their investment become worthless. This is peer-to-peer trading.

But it’s important to mention that you’re not locked into your bet. If you change your opinion, you can sell your position at the current odds anytime before the market ends. So you can always sell when odds seem to shift and you do not want to sit it through until the final verdict.

If you’re wondering about the results, the final outcome was “No.”

Limit Orders and Rewards

An extra feature of Polymarket is that it allows users to place limit orders in the order book. This means you won’t have to buy or sell instantly and could bid or ask a lower or higher price than the current market price, similar to regular trading. 

On top of that, Polymarket rewards those who fill the order book, similar to maker fees, with rewards being paid out on a weekly basis. For more information on rewards, please visit their official documentation.

Getting Started on Polymarket

Getting started requires knowing how to use a self-custody wallet and transferring cryptocurrency. This is a straightforward process.

Create Account and Deposit USDC

First, create an account on Polymarket, which can be done with a Google account or by connecting your Coinbase wallet or many of the most popular self-custody wallets.

After creating an account, it’s time to deposit money to bet with, in this case USDC. Note that you can export your private key, so you control your funds in a wallet of your choice. You can import your Polymarket wallet into another wallet provider, such as MetaMask.

Make Your First Trade

Before making your first trade, explore the available markets on Polymarket to find one you want to predict. Read the market details carefully and understand what position you are taking. Check the liquidity and use the built-in calculator to see potential returns.

Decide on your position and click “Yes” or “No” to place your bet, then enter the amount you wish to wager. As mentioned above, it is possible to create limit orders by specifying your preferred buy or sell price and amount.

Monitor and Cash Out if Right

If you are in a bet or have limit orders set, monitor the market closely. Good luck!

Drift: BET with 30 Crypto as Collateral

Drift Protocol is a decentralized exchange also built on the Solana blockchain. It expanded its protocol with a new offering and the introduction of BET (Betting Earn Terms), a capital-efficient prediction market. BET allows users not only to bet on outcomes like the U.S. election, but also earn yields on their bets as events unfold.

Unlike other prediction platforms, BET allows users to trade using any collateral available on the Drift Protocol, which includes around 30 different crypto assets, including yield-bearing stablecoins such as PyUSD and USDY. This could be a way for users to hedge their bets, setting BET apart from other prediction markets by not being limited to standard options like USDC.

Drift Labs also plans to manage its prediction markets with an in-house security council that will list and arbitrate markets, a different approach than other prediction market methods where users can create markets themselves. Currently this could result in the betting options being rather limited on the platform.

Polkamarkets: The Automated Market Maker Prediction Market

Polkamarkets is a prediction market that operates on Ethereum Mainnet, as well as Moonbeam and Moonriver, but sees most activity on Polygon. Users can directly take positions on real-world event outcomes from within MetaMask, using the stablecoin USDT to interact with the smart contracts.

How Does Polkamarkets Work?

The process is the same as discussed above.

For example, a prediction market on Polymarket where Ledger, the hardware wallet company, will file for bankruptcy before June 1, 2024, has a “No” share trading at 67c. This implies the market thinks there is a 67% chance it will not file for bankruptcy. If this outcome occurs (the company does file bankruptcy), all those who voted “Yes” will be paid out $1 on their 33c share. This follows the same structure of what we’ve seen before.

But where Polkamarket differs is that they use an automated market maker (AMM) similar to Uniswap. This offers the advantage of constant liquidity, making markets more accessible and eliminating the need for traditional order books. Pricing will be algorithmically adjusted and incentivizes liquidity providers with a share of transaction fees.

The downside of AMMs is the risk of impermanent loss for liquidity providers when asset prices change and potential price slippage in low liquidity conditions. So caution is needed when adding liquidity to these markets.

Zeitgeist: Prediction Market On Polkadot

Zeitgeist has its own prediction market which is a decentralized platform built on the Kusama network, designed to allow users to speculate on the outcomes of future events. 

The market is very new and does not have a lot of liquidity. It uses its native token, ZTG, for creating markets and enabling users to buy or sell shares in the outcome of an event. Users can use Polkadot-compatible wallets such as Talisman, Polkadot.js, or SubWallet.

From all the generalized prediction markets discussed above, Polymarket is definitely in first place in the non-sports prediction markets, primarily focusing on political events. But with the emergence of new markets, we see a revival in sports betting facilitated by blockchain, although this also falls closely under the category of Gamblefi.

Limitless: Prediction Market on Base

Limitless, which runs on Base, represents another prediction market where users can create their own markets and have the opportunity to earn rewards by actively participating. The platform allows users to predict outcomes in diverse fields such as crypto, tech, and sports.

Although the Limitless prediction market is rather small in comparison to other platforms, they see more and more relative growth, with all-time volume increasing and also an increase in weekly active users.

Hedgehog Markets: Biggest on Solana

Hedgehog Markets, a generalized prediction market, launched on Solana and closed a $3.5 million seed funding round in 2022. They expanded their offerings by launching peer-to-peer markets and an automated market maker (AMM). 

Users can create and participate in binary markets with selectable odds. All transactions are recorded on the blockchain, providing clear evidence of trades and allowing public access to the market data.

On top of that, users have the opportunity to stake their predictions, adding an additional layer of engagement and potential earning. This can be done in pooled predictions where multiple users contribute to a collective prediction pool, earning a passive yield from trading volumes in a way that attracts more liquidity to the Hedgehog markets.

Hedgehog has parimutuel pools that don’t require market makers. This works well for fun PvP style bets, but some people will want the familiar trading experience of knowing your odds and payout going in, with the ability to sell your shares anytime.

Overtime: Betting on Sport With ERC-20 Tokens

Overtime Markets, a web3 sportsbook built on Thales, followed a successful public beta phase and saw over $3,000,000 in volume and had more than 3,000 unique users.

Built on the Thales Protocol, an established and permissionless, order book-based peer-to-peer Positional Markets platform that initially deployed on the Ethereum Mainnet, but now has integrations across various blockchain platforms like Optimism, Arbitrum, and Base.

Overtime supports live betting and a variety of stablecoins and ETH for transactions. Each market runs within a dedicated smart contract that enables the minting of UP and DOWN ERC-20 tokens, using USD as collateral. At market expiry, the outcome (UP or DOWN) relative to the Strike Price determines which token can be redeemed for the total USD collateral, as reported by Chainlink.

Manifold Markets: Predicting for Charity

Manifold Markets is a prediction site that is easy to use and has an interesting feature – it donates rewards to charities. Although Manifold does not run on the blockchain or use crypto, it uses its own digital play money called Mana (M).

All users start with M500 for free. Mana can be used to create, subsidize, and promote markets on your own questions. In addition, you can purchase more mana or convert your mana earnings into real charitable donations at a rate of M100 for $1.

Perhaps Manifold will introduce crypto to its platform in the future, or maybe not – we can bet on this prediction using Manifold. Either way, it’s a win-win situation.

Swaye: Prediction Market for Degens

Swaye, currently in its open beta phase, is a prediction market platform that allows users to create and participate in prediction markets. Swaye introduces a platform designed by and for those who thrive on making speculative predictions, commonly known as ‘degens’.

Prizes on Swaye are distributed based on the performance of traders in terms of profit and loss (PnL), and top performers are recognized weekly. This is different than other prediction markets.

It’s also important to note that for potential and current users of Swaye that the platform is still in an open beta phase. This means that while the platform is fully operational, the smart contracts governing transactions and activities are unaudited.

Inertia: Mobile Friendly Prediction Market

Inertia, built on Avalanche, is a prediction market that is not yet launched but garnered attention when they secured the first place at Codebase’s inaugural Demo Day.

The Inertia platform is, according to them, designed for both the “hyper degenerate” and the “normie” in our space. A place where anyone with a topic they are passionate about can create a market.

What could be unique to Inertia is that they are developing a mobile-first application, as they understand that other prediction markets are sometimes hindered by being desktop-first.

Prediction Markets Infrastructure Platforms

Beyond prediction market platforms, the prediction markets vertical also consists of platforms that aim to facilitate and simplify the building of prediction applications.

Azuro: Building Prediction Applications in 5 Minutes

Azuro is more than a prediction market, it is a platform that simplifies building prediction applications altogether. With over several independent apps built on Azuro and 28,000 users, you could say they are the runner up in the prediction markets niche and drive a big chunk of the prediction volume.

After closing three venture rounds totaling $11 million, with notable investments from Gnosis, Azuro provides tooling and resources that ensure developers can launch their applications in just five minutes and could open up new revenue streams.

What is important is that Azuro employs a Liquidity Pool design, called the Liquidity Tree, intended to create and maintain market liquidity.

The Liquidity Tree model is a smarter way to organize compared to older methods. It helps manage digital assets better by allowing them to be very specific about where and how they put them to work—careful placement that can prevent money from being wasted when making trades (reducing slippage) and help make the most out of the invested money (optimizing capital usage).

By organizing the money into a tree-like structure, where each branch can have different amounts and types of money, investors (liquidity providers or LPs) can choose exactly where they want to invest.

Will Prediction Markets Remain Niche?

Despite their effectiveness, prediction markets remain niche, primarily due to liquidity issues. Providing liquidity is risky because of impermanent losses as liquidity providers may lose money if market prices move too quickly in one direction.

To mitigate this risk, successful prediction markets limit themselves to events with predetermined outcome dates and minimal partial insights, such as sports competitions or elections. While this approach attracts liquidity, it significantly narrows the scope of applicable questions.

Conclusion

The key idea is that prediction markets incentivize people to reveal their true beliefs through putting money where their mouth is. As more people bet, the market prices integrate into an accurate probabilistic forecast determined by the market. This could be considered a powerful forecasting tool for events with uncertain outcomes, although the wisdom of the crowd is in some cases close to room temperature IQ.

This article is only for informational and educational purposes, and should not be taken as financial or investment advice. Always do your own research before depositing funds and connecting your wallet to any crypto project.