How Smart Contracts can be Used in Prediction Markets

Last updated: Mar 30, 2023
5 Min Read
AI Generated Summary

Today, the Ethereum blockchain has effectively made smart contracts a reality. There are currently thousands of calls being made each day to these contracts, with capabilities that include everything from insurance estimations and token issuance to time locked exchanges, basic escrows and more.

What the prediction market provides is the ability for an individual to wager on the outcome of an upcoming event. More and more, Bitcoin is being made use of to place these types of bets, and new and established prediction market systems are integrating this type of Bitcoin betting.

An Overview of Prediction Markets

A prediction market is comprised of market makers in conjunction with predictors. The market maker will ask a question such as: Will the value of Bitcoin be higher than $3,575 on December 22, 2017 at 9am CST? Participants can then enter in their bets on this, by purchasing shares which are based on their prediction (yes or no).

In many instances, the market maker receives a portion of the bets which are placed. After the actual event is complete, those who purchased the accurately predicted share are compensated with a proportionate amount of the total collected prize money.

Bitcoin forecast markets are viewed as being binary in nature. Present day technologies restrict participants to making only ‘yes’ or ‘no’ wagers. More elaborate wagers are not compatible, as they open up too much indecisiveness inside the system.

When a market is developed, participants can then purchase yes or no shares, with each securing a portion of the total prize payout if their selection proves to be correct. Shares acquired in these marketplaces can at that point be kept, sold off, or exchanged for cash after the market closes.

By making exchanges in the form of shares, supplementary markets also operate wherein participants can sell off their shares in a particular marketplace. The shares may possess extra value if the marketplace is no longer available to others, yet there remains a desire to place wagers. For example, the market size limitation has been reached, or the market maker makes a decision to close the market off from any new wagers.

Prediction Markets with Smart Contracts

Ethereum Smart ContractsFor those not familiar with smart contracts, the idea is quite straightforward. A smart contract is comprised of lines of code which will take in inputs and return outputs. The program code that processes these orders is absolute and cannot be modified, so users will always know just what to anticipate. The program code is also openly available by way of the Ethereum blockchain, and the contents can be reviewed to guarantee that the contract functions in the correct manner.

Even with all of the attainable advantages and uses of smart contracts, there remain some obstacles. The start of a digital occurrence from a physical world may very well be one of the primary challenges. Although it is a relatively simple task with regards to digital transactions, the problem occurs when it relates to the start of a digital action from the real world. There are three potential remedies, including multi-signature purchases, forecast markets and oracles.

What multi-signature dealings call for is a trust agent to be engaged to assure that the conditions for activating the contract made between the parties have been fulfilled and the contract can be carried out. With forecast markets, the primary idea is that the masses can arrive at a more precise prediction of events than a solo expert.

While creating predictions on particular events, with some financial motivator, groups can be engaged in offering a real opinion. The financial incentive can be constructed in such a manner so that it rewards the most precise prediction. Consequently, the group will be rewarded for being as accurate as is possible.

The final possible solution is Oracle. Oracle's expert services are described as third-parties that are validating the end result of the events and then supply the data to data services.

Having said that, there is an issue with oracles in general. Who will be in charge of working to guarantee the reliability of the oracle? While the Oracle may pull the outcome from an unlimited network, there will still need to be some assurance that each node can be trusted and that the end result is indeed correct.

Revoltionary Betting Markets

The key issue with the Bitcoin prediction market is the massive popularity of the platform. The good news is that this problem is very likely to be solved in the coming years as more funds move into prediction market platforms. For now, the volume level of such markets or the total number of wagers placed within each market are likely to be on the lower size.

Because of this, the variety of betting options and earnings potential are likely to be restricted. Even so, many experts now predict that these platforms will soon be experience an enormous rise in popularity, contributing to a remarkable increase in the total number of betting markets and the total prize money available.

Editorial Team

The Coin Bureau Editorial Team are your dedicated guides through the dynamic world of cryptocurrency. With a passion for educating the masses on blockchain technology and a commitment to unbiased, shill-free content, we unravel the complexities of the industry through in-depth research. We aim to empower the crypto community with the knowledge needed to navigate the crypto landscape successfully and safely, equipping our community with the knowledge and understanding they need to navigate this new digital frontier. 

Disclaimer: These are the writer’s opinions and should not be considered investment advice. Readers should do their own research.

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