The line between investing and gambling has always been thin, and in the current state of fiat, where you have to be “risk on” to try and outcompete inflation losses, that rather thin line continues to blur. This is especially true for prediction markets, which have started to gain retail adoption. Prediction markets used to be specialised financial products used by investors looking to make side bets with their capital either as a hedge against certain positions or to try and get exposure to more volatility.
As the appetite for volatility from retail traders shows no sign of abating, prediction markets are starting to show up in retail trading apps and, of course, the altcoin space. We are seeing regular use of these services not to hedge against earnings calls or the trend on the oil price but to the light-hearted, like who would win the Oscars or the game on the weekend.
We all love a good wager with a friend, and prediction markets scale this to a global level and now have something of a cult following among finance types who rave about the value of putting a price on any event, anywhere in the world. Such prices capture insights naturally attract people because it’s a financial product they “Think” they understand easily.
- Decide the outcome,
- Place a wager on the outcome
- If it goes your way, collect the payout
The main purpose of prediction markets is to elicit aggregating beliefs over an unknown future outcome, some refer to it as the wisdom of crowds, others refer to it as the madness of crowds, but either way, money is on the line. Traders with different beliefs trade on contracts whose payoffs are related to the unknown future outcome; the market prices of the contracts are considered as the aggregated belief.
What are prediction markets?
Prediction markets can be private markets or open markets where specific outcomes can be predicted using financial incentives. Thes markets allow users to wage on the outcome of an agreed-on event and can be simple bets or use more granular terms or advanced contracts based on the complexity of outcomes.
Prediction markets can be simple contracts between two parties, or they can involve multiple participants where exchange-traded markets are created to trade the outcome of events. The market prices can indicate what the crowd thinks the probability of the event is.
These sophisticated prediction markets are created to allow to can trade of contracts that pay based on the outcomes of unknown future events and ensure that there is adequate liquidity. The market prices generated from these contracts can be understood as collective predictions among market participants and gauge sentiment.
The prices or odds of a certain outcome are based on the individual expectations and willingness of investors to put their money on the line for those expectations.
Why have prediction markets settled in bitcoin?
No cap
In retail prediction markets, you are often capped at the size of the wage you can make, which means you cap the possible upside and, of course, downside, and you either need to spread your bets across multiple outcomes or deal with that cap on a possible return.
The same goes for sports betting you are often capped by the market markers to ensure they control the flow of the market; with DLC’s you have unlimited size and no “per click” limits for large sports bettors.
International Settlement
If you’re using a prediction market, it’s probably a regulated entity that needs to manage different currencies and deal with the banking system, which is a pain for all involved. Instead of having to exchange forex and wait for accounts to be credited, bitcoin takes away all that complexity and makes it easier to access prediction markets anywhere in the world as long as you have a wallet and some satoshis.
Instant settlement and Non-custodial
Since the funds are locked in on the bitcoin blockchain, you are guaranteed payouts via the blockchain once the DLC’s conditions are met; you don’t have to deal with requesting payouts and getting it settled in your bank account nor trusting the prediction market’s liquidity profile or the banking system you’re using and taking exchange risk.
The odds
Fair odds for both sides of the bet (removing the vig). This is a win/win for each side of the bet.
Privacy
Since these bets are done off-chain, and with the bitcoin network, if you have no ties to those funds, like funds purchased with KYC from a regulated exchange, you can conduct wagers with privacy and anonymity. Your bet is not placed on a public market and does not affect odds.
Comparing bitcoin prediction markets to altcoin alternatives
Prediction markets and oracles exist on other chains, but the issue with altcoin prediction markets is you’re showcasing the information publicly and storing it on chain. Not only is this a waste of resources, but these wagers rely on the chain’s performance to settle, which can cause issues in reliability.
Another issue with these altcoin prediction markets is privacy; if you’re placing a certain bet on a certain outcome, not only can others see what you’re willing to wager, but if the payout is big enough, it could encourage people to try and affect the outcome or sabotage the oracle or oracles you’re using to try and game the system. Since a blockchain cannot enforce any rules outside, it’s a system; as soon as corrupted data is passed to the chain, the contracts will execute accordingly.
In addition, you also have the risk of MEV (Miner Extracted Value), where miners or validators can front-run your transactions and net a healthy profit simply by watching how these markets plan to settle.
In bitcoin, prediction markets are conducted off-chain and can be done privately; the entire blockchain doesn’t need to verify your oracle and attestations to certain events; why should it? It does not apply to everyone on-chain, only to a few parties who are interested in the outcome of a certain event, so why waste network resources and bandwidth for the interests of a few?
Instead, with DLC, users can create their contracts and leverage any oracles they like, and the exchange funds are the only part of the process that requires broadcasting to the bitcoin network.
Get technical with DLCs on Suredbits
If you’d like to get into the nitty-gritty of how DLCs and oracles will work on bitcoin, we recommend you check out the following video.
Get the app
If you’ve been curious about discrete log contracts and want to give them a try, then why not give Suredbits a try, set up an oracle on your bitcoin node and broadcast the contract and then set up a DLC based on the outcome of the event in question.
You could use these prediction markets as a way to up the stakes on your sports rivalries or get your kids to do their homework and unlock their allowance. Honestly, how you use these contracts is all up to you and can be a good bit of fun.
Sources:
If you want to learn more about Suredbits and dive down the rabbit hole, we recommend checking out the following resources.
Are you a bitcoin and DLC fan?
Have you been using prediction markets before? Would you use one settled in satoshis? Which one do you prefer?
Let us know in the comments down below.
