Prediction Market: The Emerging Force in the Crypto Assets Field

A prediction market is an open market that uses financial incentive mechanisms to forecast specific outcomes. These markets allow individuals to trade on the outcomes of various events, and the market prices reflect the public's perception of the probability of the events occurring.

The typical trading range for prediction market contracts is between 0% and 100%. The most common is the binary options market, where the price at expiration is either 0% or 100%. Users can also exit by selling the options at market price before the event occurs.

Through prediction markets, we can infer the public's future expectations about a certain event from the betting behavior of participants. Traders with different viewpoints express their confidence by buying and selling contracts, and the market price of the contracts is seen as the aggregated collective expectation.

Prediction markets have a long history, almost as long as the history of human gambling. Prediction markets in the political field seem to have existed for a long time: as early as the Middle Ages, people were keen on predicting and betting on the outcomes of the papal elections.

As the U.S. presidential election approaches, interest in betting on the political sector reached a new peak in July, especially with some eye-catching events such as the assassination attempt on Trump, Biden's withdrawal from the race, and the Democratic Party replacing Harris as their candidate. The prediction market represented by Polymarket has attracted widespread attention.

Polymarket: Order Book Tradable Prediction Market

Polymarket is a decentralized prediction market project established in 2020, founded by Shayne Coplan, and has received support from several well-known institutions and individual investors.

The platform allows users to trade on controversial topics in the world such as politics, sports, pop culture, etc., where users can build portfolios based on their predictions.

Unlike traditional sports betting, Polymarket allows users to freely trade shares on market topics that have not yet reached a conclusion, enabling speculators to flexibly participate in probability games.

Polymarket employs a mechanism based on a conditional token framework. For every 1 dollar of collateral invested, two conditional tokens are created, representing the two sides of an event outcome. A multi-outcome market is a comprehensive statistic of multiple binary outcome markets.

Conditional tokens fluctuate in the market due to trading demand, and users can buy and sell at any time through the order book; they can also wait until the event has a result, where those holding the correct coin will receive the entire profit of 1 dollar.

As the two tokens trade independently, it is possible for their combined price to not equal 1 dollar, which requires market makers to participate in balancing the price. Before the event ends, users can exchange one positive and one negative token for 1 dollar in the contract at any time.

The prediction market of Polymarket mainly includes the following parts:

• Market Theme: Each prediction focuses on a theme or event. While users can submit proposals for creating new markets, Polymarket has the final decision-making authority over market creation.

• Oracle: The determination of event outcomes usually requires manual input. Polymarket uses UMA optimistic oracles, allowing anyone to submit solutions. If there is no challenge, the solution is automatically adopted; in case of disputes, UMA token holders decide.

• Conditional tokens: Lock 1 dollar to receive two conditional tokens "yes" and "no". At settlement, the holder of the correct result receives the entire 1 dollar. The two tokens trade freely in the market, with prices reflecting probabilities.

• Order Book Market: Adopts a hybrid on-chain order book trading mechanism, user authorized signatures, matched off-chain by operators, and finally settled on-chain. Contracts are settled in a non-custodial manner, and operators do not control the staked assets.

• Liquidity Provider: Since tokens are freely traded, prices may deviate. Anyone can earn the price difference by placing orders, and Polymarket also offers additional USDC incentives.

Polymarket currently has no token issuance plans, nor does it have a user points program. However, this year, over $3 million in USDC has been distributed as incentives for market-making activities to improve the overall liquidity depth of the platform. The market with the highest trading volume pays liquidity providers approximately 600 USDC in rewards daily.

SX Bet: Single Bet Prediction Market

SX Bet is a sports betting platform established in 2019, currently operating on the SX Chain built on Arbitrum Orbit Rollup.

The betting markets supported by SX Bet mainly revolve around sports events, such as tennis, football, baseball, and basketball. Recently, sections for Crypto Assets and politics have also been added, covering trends in mainstream crypto asset prices and topics related to the U.S. elections.

Unlike Polymarket, SX Bet adopts a traditional sports betting model, only supports single bets, and does not allow free trading of bets until the outcome of the predicted event is determined.

The innovation of SX Bet lies in its implementation of a combination betting system for the first time. Users can predict a series of events, and only by getting them all correct can they receive a reward. The returns from combination betting are often considerable and can be regarded as leverage in the prediction market. The platform acts as a market maker, becoming the counterparty.

This combination bet is similar to a lottery and can yield up to ten thousand times huge returns. Successful cases can easily go viral, making it the most attractive part of the traditional sports prediction market.

Clearly, prediction markets like Polymarket, which are based on a "dual-token" conditional framework, cannot achieve combinatorial betting. This is because it is impossible for contracts to issue conditional tokens for every possible outcome combination while ensuring sufficient liquidity. Prediction markets with only two outcomes have limited odds and may lack sufficient appeal.

Pred X: Prediction Market Based on AI-Pushed Topics

Pred X is a prediction market initially based on the Sei blockchain, covering various topics such as politics, cryptocurrency price predictions, and popular events. It currently supports betting with USDC across multiple blockchains and has launched a corresponding Telegram mini-program. The mini-program offers two modes: one is a game mode to earn points by predicting trending events; the other is a real mode that links wallets for actual betting.

Unlike Polymarket, where topics are mainly generated by user proposals, Pred X's prediction topics are mostly automatically generated and pushed to the website by AI, which captures trending news and market sentiment indices from the internet, and users spontaneously form a trading market. Although it supports multiple chains, it is not a fully decentralized application. The different result prices for prediction topics are determined by the platform's centralized order book, while the ordering process and market are realized based on smart contract rules.

Objectively speaking, Pred X is still not mature enough compared to other prediction markets. The order book depth and trading volume of predict topics on the website are far lower than those of Polymarket and Sx Bet. As a prediction market, it should support users to freely trade different outcome coins before the event is revealed. However, Pred X's order book does not allow users to place orders on their own. Most markets lack market makers, making it practically impossible for users to trade outcome coins freely. In addition, the documentation does not detail how to ensure contract consistency across different chain markets under multi-chain support, as well as how to ensure sufficient liquidity for outcome coins across chains. In the "real mode" of the Telegram mini program, there are discrepancies between the prediction market for the same topic and the betting prices on the official website.

The various circumstances have led people to doubt the practicality and reliability of Pred X. Overall, this product currently resembles a semi-finished product.

Azuro: A Betting Protocol Supported by Liquidity Pools

Azuro is not a prediction market itself, but rather a foundational protocol for creating on-chain prediction markets. This no-access infrastructure includes on-chain smart contracts and web components that can be used to establish multiple prediction market applications.

Azuro only supports single bets and cannot trade freely between "yes" and "no" like Polymarket, and profits can only be obtained after the results are announced.

The Azuro system is centered around liquidity pools, and anyone can deploy their own liquidity pool via factory contracts. Multiple betting platforms can be created under one liquidity pool, and each platform can establish multiple possible events for betting on different prediction topics.

Azuro introduced the concept of "liquidity tree", which allows multiple bets on various events under a prediction topic, and even multiple topics and multiple betting platforms, to share the same liquidity pool. The liquidity tree provides a hierarchical structure, with various possible events delineating the liquidity range.

These funds ensure that the platform can act as a counterparty for bettors, paying out potential bonuses. If bettors generally incur losses, LP can profit. A liquidity tree provides liquidity for multiple prediction topics simultaneously, generating profits and losses as a counterparty.

The odds for each event under Azuro are calculated based on the ratio of the betting funds for that event to the total liquidity range of the entire prediction market. The initial odds are set by a specific data provider and initial liquidity is added. The data provider can adjust the odds during the betting process, and the solvency of these odds is guaranteed by the initial liquidity.

Azuro supports the implementation of multiple dapp platforms, and the betting platform can set up transaction dividend distributions, allowing bettors to choose freely; liquidity pool creators can also set the dividend ratio for the pools. A certain percentage of all pool profits enters Azuro's own DAO, and Azuro has also issued its native token $AZUR.

Conclusion

The concept behind prediction markets is fascinating. Participants aim for profit, viewing the free market as the most effective information gathering system to predict the real world. These results are often surprisingly accurate. In today's society, where recommendation algorithms dominate the flow of information, prediction markets seem to effectively restore the truth and reflect diverse viewpoints, as demonstrated by the predictions on political events on Polymarket.

Many crypto users may have first encountered prediction markets during the relevant index launched by a trading platform during the last U.S. presidential election. With powerful market-making capabilities, users can even participate using high leverage. Although it is a centralized platform, it does provide a very interesting experience.

Crypto Assets greatly reduce the trading friction in prediction markets, providing better and more efficient market mechanisms. Based on the ideas of smart contracts and AMM, it also brings no entry barriers and better liquidity to prediction markets. Many AI AgentFi projects even regard prediction markets as an arena to leverage collective intelligence of models and hone their capabilities.

Of course, existing solutions also have obvious flaws: Polymarket, while allowing free trading of conditional tokens, finds it difficult to implement a flexible betting mechanism, lacks high multiplier return expectations, and reduces the enjoyment for ordinary players; while liquidity pool solutions like Azuro are somewhat complex and lack the ability for post-bet re-trading.

Rather than being a mechanism and technical innovation, the current popularity of prediction markets should be seen as another large-scale application of Crypto Assets culture, a victory for the free market culture behind it. This is particularly valuable in an era where algorithmic authoritarianism gradually monopolizes information. After all, nothing is smarter than the market, and no information system is more efficient than the free market.