Prediction markets are a type of gambling where users bet a certain amount of cryptocurrency in the odds that an event will or will not happen.
When the bets are registered on a blockchain, using a certain cryptocurrency as the value token, it’s then called a cryptocurrency prediction market.
In a cryptocurrency prediction market, the bets are registered via a smart contract. This contract automatically gathers bets from players and later distributes funds to the winning bet addresses. It’s almost completely trustless, except for the fact these contracts usually have an administrator which can sometimes freeze games and perhaps move funds (this is implementation-dependent).
The amount sent to each winning address once the final outcome is known is calculated based on the stake placed by each bet. Winnings are proportional as in any betting game.
First a certain event is made the object of predictions and it is registered on a smart contract. The specifics of how this is done depends on the technology being used. For example, the Solidity programming language could be used if Ethereum were the underlying system.
The predictions are one if the event does happen, zero if it does not happen.
For this reason, when the options are only zero or one, all or nothing, it’s called a binary futures market.
Smart Contract in Action
Funds are then sent to the betting smart contract along with the binary bet – this constitutes a single entry into the betting system.
Once the result is known, the betting house manager will send the smart contract a signal containing the result.
The smart contract then executes the winners’ fund distribution routine.
All fully featured wallets are able to interact with smart contracts. To call the specific routine in the prediction smart contract, though, it’ll be necessary to implement a small client routine to call the right function and pass the right parameters. This is a very lightweight programming routine that can be implemented via a simple mobile or desktop app.
Gambling, Not Securities
Cryptocurrency prediction markets may seem like a kind of futures market, but it’s more appropriately classified as gambling.
In prediction markets, the players cannot influence the odds at all, but must wait for an event to take place in order to win.
While the knowledge of whether the event is likely to happen or not becomes clearer with time (and the odds and rewards change accordingly), the outcome itself cannot usually be changed by the players through their own knowledge or competence.
This qualifies the outcome as pure luck and is therefore considered gambling in most cases.
The only difference between cryptocurrency prediction markets and regular casino gambling is the use of smart contracts and fully decentralized and transparent blockchain transactions.
All bets, odds and other statistical data about the prediction event can be audited via the blockchain, by any user.
We hope this brief intro to prediction markets has given you a better perspective into this high risk activity.