Decentralized prediction markets (DPM's) are part of the broad spectrum of decentralized finance solutions. Decentralized finance (DeFi) generally refers to the digital assets and financial smart contracts, protocols, and applications.
The United States 2020 elections have concluded, as the Associated Press has called Biden as the election winner, with the president-elect winning 50.7% of the popular vote.
No matter the side you are on, or who you voted for, one thing is for certain though. In the outcome of the 2020 U.S. elections, DPM's came out the big winner.
Decentralized prediction markets (DPM's) took center stage during the 2020 elections, in particular Augur and Polymarket posted record trading volumes of $8.5 million and $8.6 million. Cryptocurrency participants placed their bets also using futures contracts, for example using the TRUMPWIN and TRUMPLOST tokens on the FTX exchange.
Using DPM's let's people bet on the outcome of future events, including elections, sports, world events, and other types of events.
Centralized and Decentralized
Before blockchain applications came around, prediction markets existed but they were centralized. These CPM's had several limitations such as being subject to regulations and managed by central entities which could always be prone to some sort of behind-the-scenes manipulation. There could be possible cheating and nobody would be the wiser.
With DPM's, since they are decentralized, a lot of these problems are solved. DPM's are resistent to manipulation, including being censored. Since a DPM is run using smart contracts and a blockchain, it cannot be changed by any central parties. In addition, users are in control of their own funds, and don't use any other third party as a custodian.
Decentralized prediction markets
In a DPM, users place their bets and receive tokens representing their bets. The price of each token represents the probability of the event outcome, and is determined by supply and demand market dynamics. For example, in Polymarket's Will Trump win the 2020 U.S. presidential election prediction market, the "Yes" token at the time of this writing is priced at $0.07, and "No" is priced at $0.93, meaning that 93% of the market's participants expected Biden to win the presidential election. Those who bet as "Yes" would have obviously lost the bet, and those that chose "No" would have won.
As you can see from the chart below, the people betting who would win went up and down, with some betting no, then yes, then no. Clearly there were a lot of winners and losers in this market.
The road ahead
While DPMs gained traction due to the U.S. presidential elections, longer decision times and learning curves are some of the main obstacles DPMs may be currently facing. Oracles are able to surface information quickly into smart contracts and in an immutable fashion can be a game changer.
Using DPM's to help predict free market sentiment is clearly a way to help see indicators in a sea of people who want to know what people are thinking, or who they are voting for.
...and you will also help the author collect more tips.
A good article, it doesn't matter who won the election, at least for me.