{"id":12464,"date":"2022-07-12T12:30:00","date_gmt":"2022-07-12T12:30:00","guid":{"rendered":"https:\/\/hederav2stg.wpenginepowered.com\/learning\/defi-prediction-market\/"},"modified":"2025-12-04T22:16:41","modified_gmt":"2025-12-04T22:16:41","slug":"defi-prediction-market","status":"publish","type":"learning","link":"https:\/\/hedera.com\/learning\/defi-prediction-market\/","title":{"rendered":"Understanding DeFi Prediction Markets"},"content":{"rendered":"

Decentralized finance opens the door for developers and marketplaces to emulate many of the markets found on centralized platforms. Decentralized marketplaces<\/strong> have created futures markets, options markets, and other types of derivatives using blockchain technology. One interesting new option is the DeFi prediction market, one of the new decentralized finance tools made possible by the use of smart contracts.<\/p>\n

What are decentralized prediction markets?<\/strong><\/h3>\n

This new part of the decentralized finance<\/a> world enables people to buy and sell contracts based on future events. Similarities can be drawn between prediction markets, futures markets, and betting<\/strong>. Whereas futures markets allow traders to predict the future price of an underlying asset, prediction markets enable traders to predict future events that don\u2019t relate to an underlying asset\u2019s price. Prediction market contracts often involve the outcomes of real-world events like election results, a company\u2019s sales volume, and the weather. Because of the similarities between prediction markets and gambling, some states have outlawed using real money in prediction markets.<\/p>\n

Many prediction markets use virtual tokens or \u201cplay money\u201d<\/strong> in states where online gambling is illegal.<\/p>\n

Decentralized prediction markets use smart contracts<\/strong><\/a> to eliminate the need for a central party or single operator to bring two parties together. Many of these DeFi markets use quadratic voting, allowing market participants to allocate more votes toward a particular contract if they feel strongly about it. The quadratic voting formula<\/strong> is the square of votes. This means, if it costs $1 to vote for an outcome once, it\u2019d cost $4 for two votes, $9 for three votes, $16 for four votes, and so on.<\/p>\n

There are numerous options available for anyone interested in participating in a decentralized prediction market. Augur<\/a>, for example, is built using Ethereum\u2019s ERC-20 protocol and enables user-generated markets and low fees. Augur\u2019s user-generated markets allow a market\u2019s creator to earn revenue through trading fees. Another popular option is TotemFi<\/a>, a staking-based prediction market<\/strong> that enables non-punitive predictions and collaborative rewards. If a TotemFi market participant\u2019s prediction is incorrect, that participant does not lose any of the digital assets they staked to make their prediction. Additionally, TotemFi pays rewards in BTC and their native token, TOTM.<\/p>\n

Do prediction markets work?<\/strong><\/h3>\n

In many ways, a prediction market is primarily a collective intelligence tool<\/strong>. It allows large companies and policymakers to gain insight into what the public thinks will happen in the future. These markets pull information from nearly every available source since those trading contracts use various decision-making methods. Although these methods should continue to become more accurate, there are numerous human biases to consider.<\/p>\n

The contract prices in a prediction market fluctuate<\/strong> based on prevailing opinion. For example, if a contract stating \u201coutcome A will happen\u201d trades at 65 cents, the market believes there\u2019s a 65% chance that the outcome will happen. Alternatively, if a contract stating \u201coutcome B will happen\u201d trades at 35 cents, the market believes there is a 35% chance that the outcome will happen.<\/p>\n

Many prediction markets allow traders to sell their contracts before expiration. If a participant chooses to buy a contract supporting the correct outcome, they will get $1 when the contract expires. On the other hand, they\u2019ll get $0 if they choose the wrong outcome. Still, as time passes, the contract prices may fluctuate in price.<\/strong><\/p>\n

Why do prediction markets work?<\/strong><\/h3>\n

Rather than using historical data or computer algorithms, prediction markets aim to crowdsource predictions by aggregating opinions<\/strong>. Aggregating opinions from a wide variety of people is considered an excellent prognostic tool by many organizations. Decentralized prediction market participants live all around the globe, meaning their backgrounds, daily lives, and beliefs vary significantly.<\/p>\n

Internal prediction markets have been used to forecast project management events. According to a study by Remidez and Joslin (2007), an internal prediction market was able to predict 24 of their 26 milestones<\/strong> accurately. Companies like Microsoft have even used internal prediction markets to determine product quality.<\/p>\n

What are some of the advantages of decentralized prediction markets?<\/strong><\/h3>\n

A decentralized prediction market offers numerous advantages over a centralized prediction market. For example, decentralized markets don\u2019t require intermediaries, which means fees can be lower and privacy is enhanced. People can use digital assets to participate, meaning they don\u2019t have to connect their bank account or debit card to the marketplace. One of the biggest advantages of using a decentralized prediction market is their global reach<\/strong>. Although centralized markets aggregate various opinions, they\u2019re often more biased than global, decentralized prediction markets.<\/p>\n

Since participation is open globally, decentralized markets often have more liquidity<\/strong> than centralized markets. Additionally, blockchain technology and smart contracts will allow decentralized prediction markets to advance faster than centralized markets.<\/p>\n

Although decentralized markets are advantageous, they aren\u2019t without faults. Many decentralized prediction markets allow anyone to create an event<\/strong>, meaning that some events may involve illegal or offensive activities. These controversial events might eventually lead to legislation banning certain events.<\/p>\n

Decentralized fun<\/strong><\/h3>\n

Prediction markets are just one way of using smart contracts and decentralizing technology to be creative. Online gaming<\/strong> has taken the world by storm \u2014 selling out physical arenas globally for tournament-style eSports while attracting tens of millions of viewers online. It\u2019s no surprise that as virtual gaming blossoms, there\u2019s an escalating risk of fraud by both players to gain a competitive advantage and centralized parties to exert control over ownership of in-game assets.<\/p>\n

Hedera<\/a> brings speed, trust, and fairness in transaction ordering <\/strong>when recording in-game events, such as scoring and player status, and creating or transferring digital assets to enable the next generation of online play.<\/p>\n","protected":false},"excerpt":{"rendered":"

Decentralized finance opens the door for developers and marketplaces to emulate many of the markets found on centralized platforms. Decentralized marketplaces have created futures markets, options markets, and other types of derivatives using blockchain technology. One interesting new option is the DeFi prediction market, one of the new decentralized finance tools made possible by the […]<\/p>\n","protected":false},"author":4,"featured_media":0,"template":"","meta":{"_acf_changed":false,"content-type":"","footnotes":""},"tags":[34],"class_list":["post-12464","learning","type-learning","status-publish","hentry","tag-decentralized-finance"],"acf":[],"yoast_head":"\nUnderstanding DeFi Prediction Markets | Hedera<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/hedera.com\/learning\/defi-prediction-market\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Understanding DeFi Prediction Markets | Hedera\" \/>\n<meta property=\"og:description\" content=\"Decentralized finance opens the door for developers and marketplaces to emulate many of the markets found on centralized platforms. 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