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    Explained: Blockchain-based prediction markets and how they work

    Explained: Blockchain-based prediction markets and how they work

    Explained: Blockchain-based prediction markets and how they work
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    By CNBCTV18.com  IST (Published)


    In a blockchain-based prediction market, smart contracts handle the odds, the pool of funds collected from participants and the payouts at the end of the event.

    Before we get into prediction markets and how blockchain technology is disrupting this space, let's first understand typical markets and what they are. In its simplest form, a market is where services or goods, tangible or intangible, that have value are bought and sold.
    Prediction markets work similarly, but the product is a contract on the outcome of an unknown future event. In essence, predictions are bought and sold in the form of contracts, and these contracts will pay you great dividends if your prediction comes true. You can look at it this way: like futures markets enable traders to predict the future valuation of an asset, prediction markets allow traders to predict the outcome of future events.
    For example, if the scenario is a cricket match between India and Australia, a prediction market could be selling contracts of an India win, an Australia win or a draw. Each of these contracts can have a value between $0 to $1. If you buy a prediction that comes true, you are rewarded with the contract's total price, i.e., $1.
    If the Indian team is in great form and has a winning streak going, the winnings on this prediction might not be great because the contract will be priced higher. On the other hand, if you buy contracts of an underdog win and if they happen to win, you are in for a more significant payday.
    The contracts, like stocks or crypto, have fluctuating prices based on the buying and selling and also based on the stage of the match.
    The role of blockchains in prediction markets
    Blockchains have penetrated popular culture like nothing else and have begun taking over prediction markets. It makes sense for blockchain technology to be used for prediction markets because smart contracts are more trustworthy than people and organisations that could have their own vested interests.
    So, in a blockchain-based prediction market, smart contracts handle the odds, the pool of funds collected from participants and the payouts at the end of the event. Smart contracts use oracles that help them identify variables and results and act on them to execute agreements. For instance, if it is a match between India and Australia, the game's outcome is not input by people but by oracles who derive data from different trusted sources on the internet and then execute the contract.
    Advantages of blockchain-based prediction markets
    Blockchain-based prediction markets have many advantages over traditional prediction markets — let's find out some of them.
    1. No human errors: When people run prediction markets, human greed or just silly errors could mean the difference between someone winning big and losing big. With blockchain-based prediction markets, smart contracts are written to completely negate human interaction and all the errors that come with it.
    2. The fee: When a person or organisation sets up a prediction market, there is a cost of functioning that is paid indirectly by users in the form of fees. With blockchain-based prediction markets, you have a smart contract that neither needs money nor rest and does work perfectly without complaints. Smart contracts also cut out intermediaries, further driving down costs.
    3. Free in the real sense: No government can influence a prediction market with blockchains and smart contracts. No organisation can buy out, control, or have it play to their interests. No censorship will be applicable, and no geographical borders will stop people from participating.
    Some existing blockchain-based prediction markets
    There are plenty of options out there for anyone who wants to participate in blockchain-based prediction markets. Augur (REP) is one of the most popular platforms in this regard. It touts itself as a “global, no-limit betting platform” where users can set predictions on “sports, economics, world events and more.”
    TotemFi (TOTM) is another popular blockchain-based prediction market. It is built on the Ethereum and Binance Smart Chain and offers unique features such as non-punitive predictions and collaborative rewards. This means that there are no penalties for inaccurate predictions and additional rewards for everyone if the average pool prediction is accurate.
    At the time of writing, TOTM was trading at $0.02658, up more than 9 percent in the last 24 hours. On the other hand, REP was trading at $7.07 up nearly 2 percent during the same period.
    Blockchain-based prediction markets can change how betting works today — there will be more trust among users as no one is incentivised to cheat them out of their money. We will soon be able to see creative prediction smart contracts that have not been thought of before, and they'll be more readily available for people and at lower costs because of blockchains.
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