Prediction Market: The Power of Collective Intelligence

A prediction market is an open trading platform that predicts specific outcomes through financial incentive mechanisms. These markets allow participants to bet on the outcomes of various events, and the market prices reflect the collective judgment of the public on the probability of the events occurring.

Typical prediction market contracts trade between 0% and 100%, with the most common being binary options markets, where the price at expiration is either 0% or 100%. Users can sell options at market price to exit before the event occurs.

Through prediction markets, we can extract the public's expectations about the future outcomes of certain events from the betting behaviors of participants. Traders with differing views express their confidence by buying and selling contracts, and the market price of the contracts is seen as a summary of collective judgment.

Prediction markets have a long history, almost as long as the history of human gambling. The combination of prediction markets and politics seems to have a long-standing tradition; in the Middle Ages, people were keen to bet on the results of papal elections.

As the U.S. presidential election approaches, the popularity of political-related betting reached a new peak in July, and some prediction market platforms have thus gained widespread attention.

Polymarket: Order Book Tradable 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 highly controversial topics in the world, such as politics, sports, pop culture, etc., and users can build their investment portfolios based on their predictions.

Unlike traditional sports betting, Polymarket allows users to trade shares freely before the event results are revealed, enabling speculators to flexibly participate in probability games.

Polymarket uses a conditional token framework based on Gnosis. For every 1 dollar token staked, two conditional tokens are created, representing the positive and negative sides of the event outcome. A multi-outcome market is a comprehensive statistic of multiple binary outcome markets.

Conditional tokens fluctuate in the market due to trading demand, allowing users to buy and sell at any time through the order book, or to gain profits after waiting for the event results to be announced. Since the two tokens trade independently, there may be instances where their price sum does not equal 1 dollar, which requires market makers to participate in balancing the price spread.

Polymarket's prediction market mainly includes the following parts:

• Market Topic: Each prediction focuses on a specific theme or event.
• Oracle: Uses UMA optimistic oracles, allowing anyone to submit result determinations.
• Conditional tokens: Obtain "yes" and "no" tokens by locking 1 dollar.
• Order Book Market: Adopts a hybrid on-chain order book trading mechanism.
• Liquidity providers: Profit from price differences by placing limit orders.

Polymarket currently has no plans for token issuance, but distributes USDC incentives for market-making activities through a liquidity rewards program.

SX Bet: Single Bet Prediction Platform

SX Bet is a sports betting platform established in 2019, currently operating on the SX Chain built on Arbitrum Orbit Rollup.

The platform mainly supports sports-related betting, including winner predictions for events such as tennis, football, baseball, and basketball. Recently, it has also added betting on themes such as cryptocurrency prices and the US elections.

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

The innovation of SX Bet lies in the realization of a combination betting system for the first time. Users can make predictions on a series of events, and only if all predictions are correct can they receive a prize, with potential returns that can be very significant, similar to the leverage effect of a prediction market. The platform's market makers will act as the counterparty in the transactions.

This combination bet is similar to a lottery and can yield massive returns of up to 10,000 times. Successful cases can easily go viral, making it the most attractive part of traditional sports prediction markets.

Clearly, prediction markets based on a "dual-token" conditional framework struggle to achieve composite betting, as it is impossible to create conditional tokens for every possible outcome combination while ensuring sufficient liquidity. The odds in prediction markets with only two outcomes are limited, which may reduce their appeal to users.

Pred X: Prediction Market Based on AI-Pushed Topics

Pred X is a multi-chain supported prediction market that covers various topics such as politics, cryptocurrency prices, and trending events. Currently, it supports betting with USDC on multiple public chains and has launched a Telegram mini program.

Unlike Polymarket, where topics are mainly generated by user proposals, Pred X's prediction topics are mostly automatically generated by AI from trending news. Although it supports multiple chains, Pred X is not a completely decentralized application. The prices of the prediction results are determined by the platform's centralized order book, while the ordering process is implemented according to smart contract rules.

Objectively speaking, Pred X is still not mature enough. The order book depth and trading volume for predictable topics on the website are far lower than other platforms. As a prediction market, it should allow users to freely trade different outcome tokens before the results are revealed, but Pred X's order book does not support users placing orders themselves. In the absence of market makers, users are essentially unable to freely trade outcome tokens.

In addition, the document does not elaborate on how to ensure the consistency of topic market contracts across different chains under multi-chain support, as well as how to ensure that all probability outcome tokens have sufficient liquidity on each chain. When connecting wallets for trading via the Telegram mini-program, there is a discrepancy between the prediction market for the same topic and the betting prices on the official website.

Various current situations raise doubts about the practicality and reliability of Pred X. Overall, this product currently seems more like a semi-finished product.

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 establish multiple prediction market applications.

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

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

Azuro introduced the concept of "liquidity tree", which means that multiple events under a prediction topic, as well as multiple topics and multiple betting platforms, can share the same liquidity pool. The liquidity tree provides a hierarchical structure, with different possible events defining the scope of liquidity.

These liquidity funds ensure that the platform has the ability to act as the counterparty for bettors, paying potential prizes under any circumstances. If bettors generally incur losses, the LP can earn profits. A liquidity tree provides liquidity for multiple prediction markets simultaneously and generates profits/losses as a counterparty.

The odds for each event in Azuro are calculated based on the ratio of the betting funds placed on that event to the total liquidity range of the entire prediction market. The initial odds are set by specific data providers and correspond to the addition of 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 the implementation of multiple dapp platforms, where the betting platforms can set their own fee dividends, and bettors can choose freely; liquidity pool creators can also set the dividend ratio of the pools. A certain percentage of the profits from all pools will enter Azuro's DAO, and Azuro has also issued its native token $AZUR.

Conclusion

The prediction market contains interesting philosophy behind it. Participants aim for profit and view the free market as the most effective information collection system for humanity, thereby predicting the real world. These results are often surprisingly accurate, and in today's society where algorithms dominate the flow of information, the prediction market seems to effectively restore the truth and reflect diverse viewpoints.

Cryptocurrencies have greatly reduced trading friction in prediction markets, providing better and more efficient market mechanisms. Based on the concepts of smart contracts and AMM, they have also brought no barriers to entry and better liquidity to prediction markets. Many AI AgentFi projects even view prediction markets as a competition arena to leverage collective intelligence and hone capabilities.

Of course, the existing solutions also have obvious flaws: while Polymarket has opened up the free trading of conditional tokens, it is difficult to achieve a flexible betting mechanism and lacks high-return expectations; on the other hand, liquidity pool solutions like Azuro appear overly complex and lack the ability to re-trade after betting.

Rather than being a mechanism and technological innovation, the current rise of prediction markets should be seen as another popularization of crypto culture, a victory of the free market culture behind it. This 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 efficient than the free market.