Prediction markets are important because they create renewed value for accurate, fact-based information.
It’s no secret that our internet world is deeply entrenched in false information. While “false-facts” are not a new problem, with the proliferation of information via the world wide web, we have entered a new era of concern for good quality information. Currently, anyone can call themselves an expert and offer unsolicited advice, and can do so anonymously.
One of the greatest concerns about cryptocurrencies is their volatility. Part of the reason for this is that with so many new projects entering the playing field, it is difficult to suss out the quality projects.
However, prediction markets can make value out of accuracy by going directly to the people who use the product. With the increased popularity of prediction markets, individuals will be able to give their two-cents and make it valuable, while demanding accountability by way of blockchain technology.
How do prediction markets improve accuracy?
Prediction markets are as they sound: markets created from predictions that are formed from a collective of knowledge. So essentially, they monetize accurate information by rewarding it. The advantage of these markets is that only accurate predictions are rewarded.
Alternatively, inaccuracy comes with a loss. The way that hybrid-prediction markets such as HedgeTrade and Augur work is that you can only earn money if you report quality predictions that turn out to be true. So, you are only rewarded when you’re correct about the outcome of an event for which you offered a prediction.
Prediction markets and decentralization
There are several types of prediction markets in use today. This includes fully decentralized predictions market (DPM) platforms currently built on Ethereum include Stox, Gnosis, and Augur.
Also in use are other blockchain-based prediction markets, such as:
- HedgeTrade, built on Ethereum
- Hivemind, built on Bitcoin
- Bodhi, built on Qtum.
To understand how prediction markets can work let’s look at this example:
Say you’ve made a prediction that Amazon’s stock is about to drop. Using a predictions market, you can stake cryptocurrency on the likelihood of that event.
But what if Amazon’s stock doesn’t drop and goes up instead? That mistake will trigger the automatic loss of whatever you staked. Additionally, the data on the outcome is permanently noted on the blockchain in reference to your reputation score. Your predictions will mean less and less if you continue to bet on inaccurate outcomes.
Prediction markets are possible because of the application of blockchain and its use of cryptographic blocks and cryptocurrency. This means that currently you usually must hold cryptocurrency to participate in current prediction markets. This is certainly true for how HedgeTrade’s prediction platform works.
Another aspect of modern day prediction markets is their use of smart contracts. These automated contracts ensure that the prediction outcome results are settled, without the need for a third party. Because they rely on smart contracts, outcomes are automatically executed based on the outcome of the prediction. Presently, prediction markets that use fiat currencies are restricted as they are considered a form of gambling.
A Promising New Market
Another potential benefit of the increased popularity of prediction markets is better, more accurate information. Many economic studies demonstrate that market predictions are effective because they gather information from many people who have different, valuable information and expertise to offer.
Because prediction markets have a monetary incentive to be correct, those who participate are significantly more inclined to do better research. It is this basic principle with which HedgeTrade was designed.
Let’s return to our Amazon example. Your broker has advised that Amazon’s stock is dropping. So you panic and sell your stocks at a low price. As it turns out, that was a poor piece of advice, and the stock does not drop but goes up.
What do you do now? Well, nothing. You have lost money on a poor sale, and you wonder where your advisor got this information from in the first place. Your options are limited to finding a better broker. But you’ve still taken a hit that you could have hedged if you’d only had better insight into the market.
It is these issues that predictive markets take on, and here’s how. Prediction markets are designed to gain information from multiple people in different fields.
Now let’s imagine that Amazon is rolling out a new program. The employees of the company see that it’s a good project and so they use prediction markets to bet on its success. Early adopters and investors will also be able to vouch for its success, and so they add to the prediction as well.
The reason that they are honest is not just because they are optimistic, but because if they are honest and Amazon’s new project succeeds, they stand to earn even more money. If they overhype it they will lose out doubly; on the prediction market and the failure of the product.
The good news is this also works if Amazon’s stock is in fact about to drop. This is where a whole new market of honesty is made. Seeing the failed project, the employees and investors report this. They have now made a secondary market of the projected loss, and will now earn an income from reporting the loss.
Honesty becomes a valuable market because if you report false information you will be financially penalized for it. And your reputation on the prediction market suffers as well, making your word and reputation, less valuable.
The profit of a prediction is determined only by the outcome. So you can bet on the success of a stock with all your heart and money. But, if that bet was based on false information, this will be reflected in the outcome. So, if the stock plummets and you bet on its success, you lose your stake.
This reward v. penalty has the potential for multiple positive outcomes. For one, if a problem is reported, then the company will do whatever it can to improve. This is because failure comes with an even greater loss than before. Potentially, this also incentivizes higher quality work, because companies can no longer merely make promises, they will have to follow through on their word because they not only have the secondary prediction market, but multiple sources contributing to the perceived value of the project.
Wisdom of the Crowds
As you can see, prediction markets and blockchain based prediction markets, in particular, offer a promising future steeped in better information.
Another positive is that they are not limited by location or citizenship. Anyone with internet access and knowledge to share can participate. On the other hand, there are significant limitations to accessing centralized markets.
There are predictions platforms that work with blockchain protocols on networks with varying levels of decentralization. There are purely decentralized prediction markets like Augur, and hybrid-models such as HedgeTrade. The central value is that they apply the security of blockchain technology with the power of information sharing.
This means not only are they better sources of prediction data, but this valuable information is accessible to anyone, anywhere in the world.
Monetary incentivization has a proven positive effect on information accuracy. If you want to participate in the market prediction, you need to put your money where your mouth is. If ignorance becomes expensive, then people will work to contribute accuracy to the market.
Fully decentralized predictions platform vs. partially decentralized
Fully decentralized DPMs are third-partyless and without regulatory bodies. The only regulations are built into the program and run using automated smart-contracts. The program maintains the accuracy of the protocol and ensures that stakes are settled based on the terms of the contract.
Platforms that are have decentralized features, but are not fully decentralized, include HedgeTrade, which is a tokenized application. Traders can enjoy this blockchain based predictions platform powered by smart contracts, with the same accountability and incentivization built into the platform. But participants also have a central authority (the Rublix Development team) to help them navigate these new financial waters.
With both types of platforms, the value and prices of shares are determined by the market alone. So the value of a prediction is based on the need and perception of the market. The equilibrium of the market is therefore represented by the current perception of a market and the information offered by the crowd.
As the old adage goes, two heads are better than one. But 100,000 heads are way better than two.
Blockchain based prediction markets have a great deal of potential for harnessing and improving the wisdom of the crowd. This is because the information is provided without borders. As such, a much larger group of people with collective knowledge are contributing.
Not only do these new age prediction markets offer a broader range of information, but they also reward better information. Prediction markets are presently used primarily for predicting stock market behavior and the outcome of sporting events. However, they have the potential to improve all kinds of information, and the dark days of fake news could be in sight.
A new market for research
What’s more, blockchain based prediction markets can potentially create a whole new market for research. Right now, performing research studies is expensive, time-consuming and only offers limited results based on the control groups studied. This is because research has limited funding; people want good information but that is costly.
As a result, most medical research, for instance, is funded by pharmaceutical companies that need to have profitable outcomes. However, if there was also a market that reported the success or failure of a new drug for users worldwide, wouldn’t we have better results.
If prediction markets are successful, then the effectiveness of a drug would not be left for the advertisers and people profiting from its sales. Instead, the entire market, all the stakeholders, could report on it publicly.
So, if good predictions are valued like assets, then everyone has a vested interest in forming better predictions.