In-depth Analysis of Prediction Markets: From Polymarket to Azuro

Prediction markets are an open trading system that predicts the outcomes of specific events through financial incentive mechanisms, with a history that dates back quite far. These markets allow participants to place bets on the outcomes of various events, and the market prices reflect the collective judgment of the public regarding the probability of the events occurring.

Typical prediction market contracts trade in a range from 0% to 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 this mechanism, we can extract the public's expectations of the future outcomes of events from the betting behavior of participants. Traders with differing views express their confidence by buying and selling contracts, and the market price of the contracts is seen as the aggregated expectation.

As the US elections approach, the betting interest in political-related topics reached a new peak in July. Prediction market platforms represented by Polymarket have attracted widespread attention.

Polymarket: A tradable prediction market based on order books

Polymarket is a decentralized prediction market project established in 2020, supported by several well-known institutions and investors. The platform allows users to trade on trending topics and build investment portfolios based on predictions. Unlike traditional sports betting, Polymarket enables users to freely trade shares while the outcomes of events are still uncertain, allowing for flexible participation in probabilistic betting.

Polymarket uses a mechanism based on a conditional token framework. Users stake 1 dollar to receive two conditional tokens representing the positive and negative outcomes, which can be freely traded in the market. After the event has a result, the holder of the correct token receives the entire 1 dollar profit. Because the two tokens are traded independently, it is possible for the sum of their prices to not equal 1 dollar, requiring market makers to participate in balancing the price differences.

The core components of Polymarket include:

• Market Theme: Focus on specific events, the platform has discretion to create new markets.
• Oracle: Uses UMA optimistic oracle to determine results
• Conditional Tokens: Gnosis conditional token framework based on the ERC1155 standard
• Order Book Market: Hybrid On-chain Order Book Trading Mechanism
• Liquidity providers: earn price differences through order placement and receive additional USDC incentives.

Currently, Polymarket has no plans to issue tokens, but this year it has distributed over $3 million USDC to incentivize market-making activities.

SX Bet: Traditional Single Bet Prediction Platform

SX Bet is a sports betting platform based on Arbitrum Orbit Rollup, primarily supporting bets on sporting events, and recently it has added topics related to cryptocurrency and politics.

Unlike Polymarket, SX Bet adopts a traditional sports betting model, only allowing single bets, and trading is not permitted until the results are determined. Its innovation lies in the implementation of a combination betting system for the first time, allowing users to make predictions on a series of events, where all must be correct to win, potentially resulting in high prize earnings.

This combination betting is more similar to lotteries, potentially yielding up to ten thousand times the return, making it easier to go viral. However, prediction markets based on the "dual-token" conditional framework find it difficult to implement combination betting, with relatively limited odds.

Pred X: AI-driven prediction market

Pred X is a multi-chain prediction market platform that supports betting with USDC across multiple blockchains. Its features include that the prediction topics are mainly generated and pushed to the website automatically by an AI system.

Although Pred X supports multiple chains, it is not completely decentralized. The prices of topic results are determined by a centralized order book, and the order process is based on smart contract rules. Currently, the platform is still not mature enough, with low order book depth and trading volume, and it does not support users to freely list trading result tokens. The specific implementation details of multi-chain support are also not clear enough. Overall, Pred X currently resembles a semi-finished product.

Azuro: Betting protocol supported by liquidity pools

Azuro is a foundational protocol for creating on-chain prediction markets, including smart contracts and web components. It only supports single bets and does not allow free trading of "yes" and "no" tokens.

Azuro centers around liquidity pools, where a single pool can support multiple betting platforms and prediction topics. It introduces the concept of "liquidity tree," allowing multiple events and themes to share the same liquidity pool. The odds are calculated based on the ratio of the betting funds to the total liquidity range, with initial odds set by data providers.

Azuro supports multiple dapp platforms, allowing betting platforms and liquidity pool creators to set dividend ratios. A portion of the profits will go to the Azuro DAO, and the platform has also issued a native token, $AZUR.

Prediction markets reflect the concept of a free market as an effective information gathering system, which is particularly important in today's society. Cryptographic technology has reduced trading friction, leading to better market mechanisms. However, various platforms still have some limitations, such as inadequate flexibility or complex mechanisms. The popularity of prediction markets to some extent demonstrates the victory of crypto culture and the principles of the free market.