decentralization

Blockchain based prediction markets and hybrid prediction markets may well be the answer to unreliable information. Poor information is a pernicious issue that affects not only our daily lives, but also the way markets behave.

We may learn that a stock is going to drop by an expert or a media source we rely upon. But then it turns out to be false information. This happens because the “facts” are derived from only a small set of people. 

There are a number of serious issues that contribute to the larger problem of misinformation. One problem is that we are forced to rely on self-appointed authorities to get quality information:

There are a number of serious issues that contribute to the larger problem of misinformation. One such problem is that we are must rely on self-appointed authorities for quality information:

  • Our financial advisers
  • Friends
  • The news
  • Social media
  • Polling companies
  • Research studies paid for by parties with a financial stake in the research findings.

All of these aforementioned individuals and institutions have certain limitations making it impossible for them to have all the facts.

To make the problem worse, when we act on bad investment advise and misinterpret the market, it costs the investor. It often does not affect the website, person or institution from which we received the information. 

This issue is not new, but prediction markets that utilize decentralization are now offering an avant-guard solution. 

Wisdom of Crowds: Prediction Markets

In response to the obvious limitations of siloed knowledge, the practice of following the “wisdom of crowds” (or crowdsourcing) has increased in popularity.

But we are just beginning to understand how predictive markets can use the increased quantity and quality of data available through platforms. These platforms combine crowdsourcing with immutable blockchain ledgers.

These new-age prediction platforms that are emerging help to demonstrate that truth and facts have economic value. This is where decentralization comes in.

Prediction markets have existed for centuries. Today, economists see them as a very valuable source of insight into market behavior. In this nascent stage of the cryptocurrencies and blockchain based prediction markets, they are primarily being used for predicting outcomes of sporting events and political polls.

But as these markets continue to grow in popularity, they will increasingly deal with additional types of predictions. This is the case with HedgeTrade. The HedgeTrade platform uses a hybrid prediction market platform. Trade predictions are then made on multiple cryptocurrency trading pairs.

Prediction markets that have varying levels of decentralization and use the wisdom of crowds are gaining popularity, because:

  • There is more information gathered from more people, who can choose to participate anonymously. 
  • Using uncensorable and immutable blockchain ledgers enables a higher level of data security.
  • The public at large can access the information on the open public blockchain ledger.
  • Peer to peer transactions are possible.
  • Outcomes don’t have limits for resolution, meaning the outcome can potentially be the next hour or in five years. Either way, the smart contract will automatically execute it according to predetermined parameters. And all transactions are permanently stored on the blockchain.

It is for these main reasons that predictive markets have so much opportunity for growth in today’s markets.

How prediction markets work

So here is how prediction markets work; information is aggregated from many participants.

Based on what this information is for, maybe a flu outbreak or a weather phenomenon that will affect crop production, the market generates a price. The price is simply a response to what this information is worth. Prediction markets not only compile better predictions than individuals, but people can then trade on the outcomes of these events. 

In the last 15 years, there has been an increase in economists expressing interest in aggregated information. This is where data is collected from multiple groups and includes many people.

Evidence suggests that groups tend to outperform individuals when it comes to aggregating information, weighing alternatives, and making decisions.

This means that groups are better at predicting the outcome of an event. The reason this works is that there are more participants all sharing and building upon their individual expertise or insights. The data for an event is then aggregated to reflect the most likely outcome.

Many economic theorists believe that prediction markets are highly beneficial for predicting market behavior. And there are many studies demonstrating the value and accuracy of prediction markets.  

Skin in the game

One good reason for the improved accuracy of prediction markets like HedgeTrade is that in order for an investor to participate, they must stake a bet. Traders then have skin in the game. This is a feature inherent with prediction markets that use blockchain technology.

Have you ever taken a poll, answered a survey, or posted a trade prediction on social media? Would the information you are giving away be more accurate if you knew you would lose money by giving false information?

Because there is money on the line, there is incentivization to do better research, exhibit good behavior and make intelligent decisions. If you are correct about the outcome, you will be rewarded. If you are wrong, you will lose your stake, and possibly your good reputation. Prediction markets reward and thus propagate intelligent behavior.

As an additional bonus, because there is a potential reward, prediction markets have increased participation. More information from additional subgroups contributes to an overall holistic interpretation of information. Because there is a large rate of participation, the accuracy of the information is more accurate than data from smaller sample groups. 

Imagine how much more accurate the predicted success of a piece of technology would be if everyone involved in its design and rollout were able to anonymously participate in its success or failure…

And because it is an anonymous environment, participants can be truthful. Since it is a secondary market, even if a product fails, it has created a secondary market, which may profit off the predicted failure. 

What is a Decentralized Prediction Market?

Non-centralized prediction markets are poised to provide a high level of accuracy for data. The data includes world events and markets outcomes.

This is because prediction markets source information for predictions from a borderless population. With more participants and multiple sources, the accuracy of the information provided should improve appreciably. 

Additionally, the nature of blockchain’s distributed ledgers makes a permanent record that cannot be changed or manipulated.

With the inception of blockchain and cryptocurrencies, decentralized prediction markets (DPMs) have become a reality.

We’ve seen a number of DPMs building off the Ethereum platform. One example would be Augur, where you can participate in predictions for political outcomes, sporting events, and who Warren Buffet will take to lunch.

Hybrid Decentralized Predictions Platforms

Other prediction platforms, like HedgeTrade, combine the decentralized aspects of blockchain immutability and smart contracts. The platform is coordinated by a central company (Rublix Development) that is poised to support its user base.

With a fully decentralized platform, users risk being left to their own defenses. This is because decentralized platforms run entierly with algorithms. That means that no central authority coordinates use of the platform or offers user support.

With the intricacies of cryptocurrency trading, the volatility of the market, and the lack of user expertise in a new market, HedgeTrade offers a nice balance of decentralized aspects with a company standing behind it.

The Basics – How HedgeTrade Works

On the HedgeTrade predictions platform, traders earn by publishing and selling Prediction Blueprints. These participants use the HedgeTrade tokenized app to make market predictions on various cryptocurrency pairs at different exchanges.

The main idea is to enable professional traders to sell their predictions to less experienced traders, while also staking differing amounts as a way to earn even more. Smart contract powered “Prediction Blueprints” can be published by knowledgeable traders and sold in the Predictions Marketplace to newer traders who are looking for a copy trading experience.

But what sets HedgeTrade apart from its competitors is that it holds its traders accountable for their predictions in two interlocking ways:

If a prediction is incorrect, they lose their stake. Those users who bought their prediction also get their money back.

All the trade data on this type of prediction marketplace is immutably time stamped on the blockchain and available for public dissemination and analysis.

Not only that. The track records of the Blueprint publishers are fully available to those browsing Prediction Blueprints to purchase and unlock the details. If a trader is not making accurate forecasts, are not successful, those browsing the Blueprint marketplace will see their reputation scores and know their level of accuracy.

In this system, those with the highest levels of accuracy quickly rise to the top. Those participants who are still learning have access to predictions made by the most successful trade predictors (as well as not so successful!).

The HedgeTrade tokenized app helps to solve the problem of accountability in information disbursing. On top of that, you still have the aggregated crypto trade data plus the borderless and anonymous features that make prediction markets so attractive.

prediction markets

It’s very likely that platforms such as these will have a very positive effect on the increased success of market predictions. And as the aggregation of collective information continues to improve, it will also have a positive effect on the struggle between truth and fake news.

The new era of prediction markets

With the increased popularity of cryptocurrency, blockchain based prediction markets have entered a new era. In their current form, however, as with cryptocurrency and blockchain applications, there are some technological limitations, such as with scalability and application. But, just like cryptocurrencies, which have exploded in the last 10 years, we have good reason to believe that they will also increase in popularity.

What incentivizes participation?

Improved quality of public information is not the only reason to use prediction markets. To participate in a decentralized or hybrid prediction market, one must stake money. You must literally put your money where your mouth is. So, if your prediction is correct, you are rewarded with a payout. If it is not, you will lose your stake. 

Participating in a prediction market means buying shares in an event outcome. The kinds of future events to place a stake on are enumerable. But they are limited to yes or no outcomes, as they are correct or incorrect. These predictions are referred to as “atomic”. Atomic predictions are necessary as they are binary (yes or no); they occur or do not occur. 

Example:

  • In a prediction market, price equals perceived probability. That means that if a YES share costs 75 cents, the market (and collective) believes there is about a 75% chance that the event will occur. 
  • And if each NO share costs 40 cents, then the market thinks there is about a 40% chance that the event will not occur. 

The future event could be if it will rain in Paris tomorrow. Or if a stock’s value will increase, or who will win a forthcoming election. And because there is a large amount of participation in the outcome of real-world events, more information gets aggregated. That means that more factors are considered when trying to determine an outcome. 

So if another prediction is that Apple’s stock will increase, and then the developers share that there is a problem with a new product, they can actually bet against the stock going up. As a result, not only does the rest of the market respond faster, but a secondary market of predictions is created. So if Apple’s stock drops, but many employees predicted this correctly, then they could potentially benefit financially from being correct. Even if the company does not benefit from it. 

Reputation staking

Finally, when you participate in a protocol such as HedgeTrade or Augur, you not only stake your money on your prediction, you also stake your reputation. That means that if you consistently offer poor, uninformed advice, your reputation is proportionally affected by this bad judgment. As a result, your word will become less valuable, having less meaning for the results of any future prediction. 

In a certain way, prediction markets are creating a new market out of uncertainty, while simultaneously improving the sharing of information. 

How does this all work?

The success of these new prediction markets relies on blockchain technology, cryptocurrency, smart-contracts, and the general models of incentivization.

Blockchain based prediction markets work because there are many participants all around the world. This broad-reaching and diverse collaboration inevitably contributes to a stable network.

Additionally, since they are established via blockchain, the data is immutable. This is because the cryptographic ledger ensures that information is maintained accurately and securely.  

The reason this works is that in order to participate in this type of prediction market, you need to hold cryptocurrency. That is your stake against your prediction.

Financial reward and risk of failure demonstrate a marked improvement in the reliability of the information.

When people stand to risk money they are more likely to better prepare themselves by doing more research in an effort to increase their chances of success.

Limited subsets

With surveys and census data collection, the information inevitably comes from a small selection of people – experts in the field, and easily accessible willing participants. In both cases, this means that the behavior of markets and world events is limited to a small subsection of people. Limitations are based on social demographics, geographical location, as well as the ease of accessing these people. 

Those who are surveyed often cite the same information because of the limited information pool. However, if the section is broader and globally based, then those participating are going to bring a broader demographic of information to the table. Based on the collective of information, this would allow for more accurate predictions.  

Limitations of Centralized Prediction Markets

Prediction markets are not really a new thing, but until now they have been ‘centralized.’ What we mean by centralized is that predictions are based on information that is gathered by a specific group. It could be a team of research scientists, statisticians, actuaries, political groups, private companies or personal interest groups. 

Although none of these groups are intrinsically bad for markets, the problem is that they all have their own limitations. The primary problem is that each group has a specific interest that leads to a certain limitation of their collected information. And then only like-minded people will seek out the information that is provided.

Example:

Private companies and political groups alike have a biased interest in research outcomes. Each is interested in the outcome that will serve their own gains.

And the information collected by academics often ends up siloed in universities. Findings are then published in cryptic language and in journals inaccessible to non-academics. 

Thus the overall problem of centralized information is that it is limited to those with privileged access. It is also limited to those lucky enough to have their research interests funded and supported. As a result, the accessibility of quality information continues to be a challenge.

How data sharing is better with blockchain

Centralized prediction markets have been around for a long time. What blockchain based prediction markets bring to the table is improved access to information sharing

A prediction market is comparable to Wikipedia. Just as anyone can add something to Wikipedia’s free encyclopedia, so can anyone with more or better information report a problem or add to an entry. The information from the encyclopedia is shared globally. The only limitation to Wikipedia access to a network. 

The idea is not only are two heads better than one, but that there is a shared responsibility to ensure accuracy.

Beyond the improved sharing and accuracy, predictions can now add in financial incentivization. So while you might feel the temptation to have a laugh on Wikipedia and say that the capital of Canada is New York City, you would not want to fool around with the data you are entering on a platform like HedgeTrade or Augur, where you’re staking your own crypto to back your prediction.

On prediction platforms like HedgeTrade and Augur, you must stake your money and your reputation. A smart contract is in place to make sure you only get paid for accurate information. And you will not gain any agreement that NYC is the capital of Canada (because it is Ottawa, by the way). As such, your reputation score would decrease relative to the bad information you submitted.

Here’s how it works:

As mentioned, Buy and Sell transactions are atomic, which means that there are only two possible outcomes of the prediction.

Smart-contracts settle prediction transactions. The transaction is executed as soon as the conditions of the contract are met.

decentralization

Both blockchain based markets and Wikipedia demonstrate the “wisdom of the crowd” phenomenon. The main difference between the two is that in a prediction market, accuracy is capital.

You have nothing to gain and everything to lose from perpetuating false information.

Thus these new-age prediction markets create liquidity out of accurate information. Before blockchain technology and Wikipedia, access to quality information was also limited. Only those with access to private academic journals, physical libraries, and expensive expert advice

Now we are making strides towards fewer barriers to quality information, as well as fewer limitations on sharing information. 

Challenges and Limitations

Limited participation

While there are many potential benefits to fully decentralized prediction markets, fully decentralized markets face several limitations.

Ethereum and other blockchain technologies may have some usability limitations so they have not enabled a sufficient level of participation.

In short, fully decentralized prediction markets are still very young.

That said, Wikipedia started off in some pretty dire conditions and has since become a useful and accurate source of information and responsible peer review. So, it is entirely likely that in 5 to 10 years from now, prediction markets will be much more far-reaching and influential, as well as profitable, to its participants.

For now, hybrid platforms like HedgeTrade use the best decentralization has to offer while still maintaining enough control to make the platform efficient, scalable and intuitive for its users.

Regulations

Moreover, as of now, prediction markets are facing regulatory limitations. They are considered a form of gambling in several American States. And as cryptocurrency and decentralized networks gain popularity, they also face newly mandated regulatory bodies. Facebook’s Libra is a prime example of the institutional response to a big tech cryptocurrency project. 

Some economists have suggested that in an effort to manage the worry of gambling there should be an individual cap on what one can spend in the predictive market annually. This no doubt rubs against the many decentralization supporters and cryptocurrency enthusiasts with libertarian ideals.

Fear of collusion

Finally, and the genuinely concerning limitation of any prediction market, is the fear of collusion. This is when there is an organized program which intends to deceive and mislead the markets. It is not hard to imagine that companies or individuals with enough means would want to use their money to influence decisions about stocks. 

Incentivization and Problem Solving with Decentralization

Incentivization is at the core of the solution to many of the challenges that face information dissemination and prediction markets. Those who stake on the accurate outcome win an additional stake. Those who report inaccurate outcomes will lose their stakes.

Many economic studies demonstrate that these stakes are an effective way to incentivize honest reporting and personal fact-checking. 

The overall design of decentralization focused systems harnesses the incentivization of honesty with monetary rewards. Decentralized networks like the Bitcoin Network only work when there is a 51% agreement. Similarly, prediction markets only work with a combination of blockchain, cryptography, and real-world events; if the event doesn’t happen, then it is not recorded in the blockchain. 

Simplicity

One of the reasons for the success of prediction markets that embrace decentralization is that they are simple. There are only two kinds of predictions: YES (long) shares and NO (short) shares. The payout of each share depends on the outcome of the event, and so payout takes place only after the event has occurred and an outcome has been reported. 

In a simple prediction market, each YES share pays out a dollar if the event in question occurs. Alternatively, there is no payout if it does not occur. But, if there is no reported result, then a NO share pays out a dollar.

With HedgeTrade, you have certain choices when making a prediction, such as:

  • Which cryptocurrency
  • What exchange
  • The amount to stake
  • How much to charge for your Prediction Blueprint
  • Your expiration date for the prediction

Predictions on the HedgeTrade Platform are thus related to certain cryptocurrency prices as traded on various exchanges.

What you need to participate

In order to use a blockchain based predictions platform, you will need a digital wallet with cryptocurrency; bitcoin and Ethereum are great to start you out. You can use any of the following industry standard wallets of your choosing, such as MetaMask, Ledger, Trezor, AirBitz, and uPort. A wallet is necessary so that users can participate in transactions and coin staking

Review

Prediction markets are just as they sound; a market made out of predictions formed by collective knowledge. Essentially, prediction markets monetize information. However, when only accurate predictions get rewards, while inaccuracy will cost you. 

Predictions markets that integrate the tenets of decentralization are currently building out on the Ethereum Blockchain, including HedgeTrade, Stox, Gnosis, and Augur. Related protocols on other blockchains include Hivemind built on Bitcoin, and Bodhi built on Qtum.

All of these new-age prediction platforms offer a promising new market.

Here are a few reasons why:

  • They are not limited by location or citizenship. That means that anyone with network access and knowledge to share can participate. This is because decentralization means blockchain ledgers that are open and public. 
  • These platforms use a model of incentivization by monetizing an event. So if you want to participate in the market prediction, you need to put your money where your mouth is. Evidence from multiple economists suggests that staking money incentivizes knowledgeable contributions and de-incentivizes uninformed opinions. 
  • Prediction markets that are decentralization are possible because of the application of blockchain technology. They are therefore secure because they use cryptographic blocks and cryptocurrency. This means that you must hold cryptocurrency to participate in predictions. Moreover, all results are settled using smart contracts, which means they are executed automatically and are based on the outcome of the prediction. 
  • All Buy and Sell transactions are atomic, which means that there are only two possible outcomes of the prediction; the event occurs as predicted, or it does not. 
  • Prediction markets that are 100% decentralized are third-party-less and without regulatory bodies. The only regulations are built into the program and executed by smart-contracts.
  • Many states may consider centralized prediction markets to be a form of gambling and are therefore illegal. Regulations on decentralized and hybrid prediction markets are still being rolled out.
  • The value and prices of shares are determined by the market alone. The equilibrium of the market is realized by the existing judgment of a market, which now includes information attained from the crowd. 

  • They are not limited by location or citizenship. That means that anyone with network access and knowledge to share can participate. This is because decentralization means blockchain ledgers that are open and public. 
  • These platforms use a model of incentivization by monetizing an event. So if you want to participate in the market prediction, you need to put your money where your mouth is. Evidence from multiple economists suggests that staking money incentivizes knowledgeable contributions and de-incentivizes uninformed opinions. 
  • Prediction markets using the tenets of decentralization are made possible because of the application of blockchain technology and its use of cryptographic blocks and cryptocurrency. This means that you must hold cryptocurrency to participate in predictions. Moreover, all results are settled using smart contracts, meaning that they are executed automatically and are based on the outcome of the prediction. 
  • All Buy and Sell transactions are atomic, which means that there are only two possible outcomes of the prediction; the event occurs as predicted, or it does not. 
  • Prediction markets that are 100% decentralized are third-party-less and without regulatory bodies. The only regulations are built into the program and the smart-contracts.
  • Many states may consider centralized prediction markets to be a form of gambling and are therefore illegal. Regulations on decentralized and hybrid prediction markets are still in formation.
  • The value and prices of shares are determined by the market alone. The equilibrium of the market is represented by the present perception of a market and the information gained from the crowd. 

Decentralization = Better Information

Prediction markets that harness decentralization have a great deal of potential for harnessing and improving the wisdom of the crowd. Information in such a setting has no geographical restrictions and comes from multiple locations. As a result, the information available is representative of a much larger group of people. 

So, not only do they offer a broader range of information, but they also reward better information. By incentivizing predictions with a reward, honesty incentivized, and so is diligent research.

Most importantly, dishonesty comes with a financial loss. This means that with prediction markets there is the potential for a renewed market on research.

Performing research studies is expensive, time-consuming and only offers limited results based on the control groups studied. But if people value good predictions like assets, then everyone has a vested interest in forming better predictions for success.

trade predictions