Prediction Market: Open Event Outcome Trading Platform

A prediction market is an open trading platform that predicts the outcomes of specific events through financial incentives. These markets allow participants to wager on the possible outcomes of various events. Market prices can reflect the overall public opinion on the probability of an event occurring.

The typical trading price range for prediction market contracts is between 0% and 100%. The most common form is the binary options market, where the price at expiry is either 0% or 100%. Users can also sell options at market price to exit before the event is revealed.

Through prediction markets, we can extract the public's future expectations of an event from the betting behaviors of participants. Traders with different viewpoints express their confidence in possible outcomes by buying and selling contracts, and the market prices of these contracts are seen as the aggregated public expectations.

Prediction markets have a long history, almost as long as the history of human gambling. Political predictions seem to have been popular throughout the ages; in the Middle Ages, people were keen to bet on the results of papal elections.

As the U.S. elections approach, a series of events in July, such as the assassination attempt on Trump, Biden's withdrawal from the race, and the Democratic Party replacing Harris as a candidate, have sparked a new wave of political betting. The prediction market platform represented by Polymarket has thus attracted widespread attention.

Polymarket: tradable order book prediction market

Polymarket is a decentralized prediction market project established in 2020, founded by Shayne Coplan, and has received support from several well-known institutions and investors.

The platform allows users to trade on controversial topics in the world, such as politics, sports, and pop culture, (, where users can build portfolios based on their predictions.

Unlike traditional sports betting, Polymarket allows users to freely trade shares before the outcome of events is revealed, enabling speculators to flexibly participate in probability games.

Polymarket adopts a mechanism based on a conditional token framework. For every 1 dollar of collateral a user stakes, two conditional tokens representing the two possible outcomes of an event are created. These tokens can be freely traded on the market, and their prices fluctuate based on demand. Users can also wait until the event concludes, at which point those holding the correct token will receive the entire 1 dollar profit.

Since the two tokens are traded on independent markets, it is possible for the sum of their prices to not equal 1 dollar, which requires market makers to engage in arbitrage. Before the event ends, users can also exchange one positive and one negative token in the contract to redeem 1 dollar in collateral.

Polymarket's prediction market mainly includes the following parts:

• Market Theme: Each prediction focuses on a specific theme or event. Users can propose new markets in Discord, but Polymarket has the final say on which markets to create.

• Oracles: Event outcome determination usually requires manual input. Polymarket uses UMA optimistic oracles, allowing anyone to submit results. If there are no disputes, the result will be adopted. In very few controversial cases, it is decided collectively by UMA token holders.

• Conditional tokens: Locking 1 dollar can obtain two conditional tokens "yes" and "no". At settlement, the correct side receives the entire 1 dollar. The two types of tokens can be freely traded, and the price reflects the probability expectation.

• Order Book Market: Adopts a hybrid on-chain order book mechanism, user-authorized signatures, matched by operators off-chain, and ultimately settled on-chain with contract interactions.

• Liquidity Providers: Due to the allowance of free trading, token prices may deviate. Anyone can profit from price differences by placing orders, and Polymarket also provides additional USDC incentives.

Currently, Polymarket has not announced a token issuance plan nor a user points incentive mechanism. However, this year it has distributed over $3 million USDC to incentivize market-making activities to enhance overall platform liquidity. The market with the highest trading volume pays liquidity providers approximately $600 USDC in rewards daily.

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SX Bet: Single Bet Prediction Market

SX Bet is a sports betting platform founded in 2019, currently running on the SX Chain on Arbitrum Orbit Rollup.

SX Bet mainly supports betting on sports-related topics, including predictions for the outcomes of major events such as tennis, football, baseball, and basketball. Recently, sections for cryptocurrencies, popular tokens, and politics have been added, allowing bets on the price trends of mainstream crypto assets and the results of the U.S. presidential election.

Unlike Polymarket, SX Bet adopts a traditional sports betting model, supporting only single bets, and users cannot freely trade their wagers before the event results are revealed.

The innovation of SX Bet lies in the realization of a combination betting system for the first time. Users can predict a series of events, and only if all are correct can they receive a prize. The returns from combination betting are often considerable and can be seen as leverage in the prediction market. The market makers of SX Bet will act as counterparties.

This combination bet is similar to a lottery and may bring returns as high as tens of thousands of times. Successful cases can easily go viral and are the most attractive aspect of traditional sports prediction markets.

Clearly, prediction markets like Polymarket based on a "dual-token" conditional framework cannot achieve composite betting. This is because contracts cannot mint conditional tokens for every combination of outcomes and ensure adequate liquidity. The odds of prediction markets with only two outcomes are limited, which may not be attractive to users.

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Pred X: Prediction Market Based on AI-Pushed Topics

Pred X is an initial prediction market based on the Sei blockchain, covering various topics such as politics, cryptocurrency price predictions, and popular events. It currently supports betting with USDC on multiple blockchains and has launched a Telegram mini-program.

Unlike Polymarket, where topics are primarily proposed by users, the prediction topics on Pred X are mostly automatically generated and pushed to the website by Aimelia AI through internet scraping of trending news and market sentiment indexes, forming a trading market spontaneously by users. Although it supports multiple chains, Pred X is not a fully decentralized application. The prices of prediction results are determined by the platform's centralized order book, while the ordering process and market follow smart contract rules.

Objectively speaking, Pred X is still not mature enough compared to other prediction markets. The order book depth and trading volume for predictable topics on the website are far lower than those of Polymarket and SX Bet. As a prediction market, it should allow users to freely trade tokens of different outcomes before the event is revealed. However, the order book of Pred X does not support users to place orders themselves. In the absence of market makers in most markets, users are effectively unable to trade outcome tokens freely. Furthermore, the documentation does not detail how to ensure the consistency of topic market contracts across different chains under multi-chain support, as well as how to guarantee that all probability outcome tokens have sufficient liquidity across the chains. When connecting wallets for trading in the "real mode" of the Telegram mini-program, there are discrepancies between the prediction market for the same topic and the betting prices on the official website.

Various circumstances have raised doubts about the practicality and reliability of Pred X. Overall, this product currently resembles a semi-finished product.

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Azuro: A Betting Protocol Supported by Liquidity Pools

Azuro is not the prediction market itself, but rather a foundational protocol for creating on-chain prediction markets. This permissionless infrastructure includes on-chain smart contracts and web components that can be used to build multiple prediction market applications.

Azuro only supports one-time bets and cannot trade freely between "yes" and "no" like Polymarket; profits can only be obtained after the results are announced.

The Azuro system is centered around liquidity pools. Anyone can deploy their own liquidity pool by interacting with the factory contract. Multiple betting platforms can be created under a single liquidity pool, and each platform can establish multiple possible events for betting on different prediction topics.

Under binary split models like Polymarket, liquidity is divided among different prediction events. Azuro introduces the concept of "liquidity tree", where multiple events under a single prediction topic, and even multiple topics across multiple platforms, can share the same liquidity pool.

The liquidity tree provides a hierarchy, with various possible events defining the range of liquidity, 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 at any time, paying a potential bonus ) which is a loss for LP (. If bettors generally incur losses, LP can profit. A liquidity tree simultaneously provides liquidity for multiple prediction topics, generating profits and losses as a counterparty.

The odds for each event in Azuro are calculated based on the ratio of the betting funds for that event to the total liquidity range of the entire prediction market. The initial odds are set by specific data providers who add the initial liquidity. Data providers can also adjust the odds during the betting process, and the solvency of these odds is guaranteed by the initial liquidity.

Azuro also supports multiple dapp platforms. The betting platform can set its own transaction dividend, and bettors have the freedom to choose; liquidity pool creators can also set the pool dividend ratio. A certain percentage of all pool profits goes into Azuro's DAO, and Azuro has also issued its native token $AZUR.

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Summary

The prediction market contains interesting philosophy behind it. Participants, aiming for profit, view the free market as the most effective information collection system, thereby making predictions about the real world. These results are often unexpectedly accurate. 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 events on Polymarket.

Many cryptocurrency users may first encounter prediction markets through the candidate index launched by a trading platform during the last presidential election. With strong market-making capabilities, users can even engage with high leverage. Although centralized, it is indeed a very interesting experience.

Cryptocurrency has greatly reduced trading friction in prediction markets, providing better and more efficient market mechanisms. Based on the ideas of smart contracts and AMM, it has also brought no barriers to entry and better liquidity to prediction markets. Many AI AgentFi projects even view prediction markets as a competitive arena to harness collective intelligence and hone their capabilities.

Of course, the drawbacks are also very obvious: although it has opened up free trading of conditional tokens, it is difficult to realize a flexible betting mechanism, lacks the expectation of high returns, and has lost some of the fun for ordinary players; while the liquidity pool scheme is obviously still a bit complex and lacks the ability to trade again after betting.

Rather than being a mechanism and technological innovation, the current explosion of prediction markets should be seen as another large-scale application of crypto culture, a victory of the free market culture behind it. This is particularly valuable in an era where algorithmic authority gradually monopolizes information. After all, nothing is smarter than the market, and no information system is more efficient than the free market.

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