Prediction Markets are exchange-traded markets where the future outcomes of events are traded. It indicates the confidence of the crowd in a specific future event.
What Is A Prediction Market?
A prediction market is a platform that revolves around the speculation of the outcomes of events across a wide spectrum of industries. Unlike regular markets, where people speculate on the price of an asset, in predictions, you can speculate on the outcome of all kinds of events like election results, sporting events, and contest results. Recently, absurd predictions, like “the color of the outfit during a US presidential speech” or even “number of coronavirus cases” have been observed in prediction markets.
There are also, however, some prediction markets that use the parimutuel system where all punters back possible predictions and place their bets into a pool. The winning prediction takes the entire pool of bets and divides it among punters proportionally to their share of the winning stake. In this case, the organizer takes a small commission of the pot.
Because of the need to evaluate the predictions of many people, prediction markets rely on big sample sizes. So the more people participate, the more data they have, and the more accurate they are.
Many modern prediction markets use blockchain technology to offer different types of incentives to encourage people to bet on predictions. In general, some of the following strategies or mechanisms are practiced:
- The closer your predictions are to the actual outcome, the better your reputation score will be, and the more impact your future predictions will have on your winnings.
- The farther your predictions are from the “crowd wisdom”, the greater the payout should your prediction be correct.
- The earlier you predict, when there isn’t enough data to see, the higher your time weight will be in the calculation of your winnings.
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