It is still difficult to gain momentum. What are the conditions for the crypto prediction market to explode?

کی طرف سے اصل مضمون Min Jung

Odaily Planet Daily Golem کے ذریعہ مرتب کردہ ( @web3_golem )

Editors note: The crypto prediction market has received a lot of attention in this cycle, and many people believe that it is an important representative of the new round of blockchain applications that have broken through the circle. Data shows that the cumulative transaction volume of the leading crypto prediction platform Polymarket in 2024 exceeded US$600 million, and its user base exceeded 150,000. Such an impressive performance has even been publicly praised by Ethereum founder Vitalik . However, has the crypto prediction market really become popular on a large scale?

The most popular prediction topics on Polymarket are all related to the US election, and the predicted prize pool for the winner of the 2024 US presidential election even exceeds 570 million US dollars. However, the prize pools and number of participants for other prediction topics are not too large; in addition to the US election, the Paris Olympics should be one of the hottest events in the world recently, but the most popular national gold medal ranking prediction prize pool in the Olympic theme on Polymarket is only about 10 million US dollars , which is a big gap from the capital volume and number of participants of traditional gambling platforms.

Does this gap also reflect that the crypto prediction market has a certain amount of traffic only in the short-term topic areas that the crypto industry is more concerned about (such as the US election), while the popularity and breaking circle effect in other areas are not as extensive as imagined. So, what are the factors that hinder the further development of the crypto prediction market? What are the corresponding solutions? Odaily Planet Daily selectively compiled Prediction Markets: The Next Big Thing? written by Min Jung to explore the advantages of the crypto prediction market and the factors that affect its development.

Key conclusions:

• Crypto prediction markets are becoming more accurate because of financial incentives. These markets cover a wide range of topics from sports to political events, and as blockchain technology continues to develop, so too is the transparency and trust in the platforms.

• Prediction markets are popular for providing accurate and real-time predictions. They allow users to bet on specific outcomes, providing users with novel investment and hedging opportunities, acting as a hedging tool for events that are not covered by traditional financial products.

• Despite their potential, crypto prediction markets face significant challenges. Compared to traditional financial markets and sports betting, they are less attractive to both professional investors and casual players, resulting in lower liquidity.

Why prediction markets are gaining traction

The accuracy rate exceeds that of general surveys

What makes prediction market results worth considering is that using real money as a bet increases the accuracy of predictions. Financial incentives force participants to invest more effort in making smart and accurate predictions. Once money is involved in any prediction, individuals are more likely to rationally analyze lineups, past performances, and other relevant details to improve their chances of winning.

Research shows that prediction markets have better accuracy than traditional surveys. Berg, Nelson, and Rietz (2008) in Long-Term Prediction Market Accuracy show that markets involving financial interests consistently provide more accurate predictions than traditional polling methods. This view is echoed in Liesters study Prediction Markets and Political Polls: Predicting Election Outcomes, who found that prediction markets provide a better predictive tool for political outcomes. Such research shows that prediction markets produce data with higher accuracy than traditional surveys (such as telephone polls), providing a clearer and more reliable picture of the future of events. This makes prediction markets a powerful tool for predicting a variety of outcomes, and even trusted media outlets often cite them.

“Prediction markets” are specifically designed to predict events such as elections. Although election prediction markets have been around for nearly two decades, to date we have provided evidence that prediction markets outperform polls over a longer period of time, comparing election eve forecasts and final polls to actual election results. We collected national polls from U.S. presidential elections from 1988 to 2004 and asked whether polls or contemporaneous Iowa Electronic Markets market forecasts of vote share were closer to the final outcome of the two major party votes. We compared market forecasts to 964 polls from five presidential elections since 1988, and prediction markets were closer to the final outcome 74% of the time. Furthermore, markets significantly outperformed polls in every election when forecasts were made more than 100 days in advance.

Source: Prediction Markets and Political Polls: Predicting Election Results

Real-time updates

The prediction data of the prediction market is updated in real time. Traditional surveys or polls may take hours to weeks to produce results due to slow data collection, while the prediction market can quickly absorb and reflect current event information and opinions through financial transactions. This immediacy enables the prediction market to track public sentiment in real time, and thus become a valuable way for traditional media to obtain the latest information.

New investment and hedging opportunities

Prediction markets also provide new investment and hedging opportunities. Take investing in a movie studio as an example. From the perspective of traditional financial instruments, one might predict its future success by investing in the equity of the movie studio. Prediction markets allow for more detailed and specific predictions, such as predicting the number of viewers when a certain movie is released. The flexibility of prediction markets enables more precise and targeted risk exposure, allowing investors to isolate risks and express their investment views in a variety of ways.

In addition, prediction markets are similar to traditional financial instruments, providing a hedging mechanism for unexpected events. For example, a New York pizza shop owner who is worried about a possible snowstorm can bet on heavy snow in the prediction market. This bet will serve as a financial safety net (hedging tool) to compensate for the losses caused by the snowstorm. Therefore, prediction markets can further integrate financial strategies into daily life, promote risk management and reduce losses caused by uncertainty.

Polymarket’s past prediction themes, source: Polymarket, Presto Research

Factors and countermeasures hindering the development of the crypto prediction market

But the biggest problem facing crypto prediction markets today is liquidity. Even at their peak, attention is mostly short-lived and limited to specific periods such as elections, and only the top 3 to 5 prediction topics have enough trading volume for people to trade large amounts (e.g. $1,000). So why is it so difficult for prediction markets to attract liquidity, and how can it be solved?

Difficulty attracting professional investors

Despite the huge potential of crypto prediction markets, their binary payout structure of “lose it all or win it all” makes them more suitable for retail investors than traditional investors. While participants can theoretically sell their positions before the verdict date, most prediction topics tend to be decided in a split second rather than over time. For example, while investors may take profits or stop losses on topics such as “who will win the most gold medals at the Olympics,” other topics, such as “will Biden say ‘folks’ in his inaugural address,” can be concluded immediately and it is almost impossible to set a stop loss because the market moves quickly. Because of the high volatility and the high possibility of losing everything, prediction markets have difficulty attracting professional investors and institutions.

• Solution: Attracting options users

The binary payout structure of lose it all or win it all also exists in the traditional financial markets in the form of options. Options are divided into two categories: short-term options or 0 DTE (zero day expiration) options and long-term options. The former are more speculative and preferred by retail investors, and crypto prediction markets can attract this group of users (I will discuss why this does not happen later). Long-term options, on the other hand, are mainly used for hedging rather than as a tool for direct directional exposure. At the same time, options are often used in combination with other options or stocks (such as straddles, iron condors, covered puts) rather than simply using calls or puts. Therefore, if crypto prediction markets want to attract users who do long-term options, they need to be effective hedging tools not only as pure investment tools.

Unable to meet the needs of short-term players

So how attractive is the crypto prediction market to players such as sports betting? The fact is that the crypto prediction market is also difficult to attract these players, because the crypto prediction market has a slower settlement time for bets, is more like a long-term market, and lacks high-quality themes that can only be traded on the crypto prediction market.

The settlement dates for the top 10 forecast themes in Polymarket are as follows, which is in stark contrast to sports betting, where most settlements are concluded within a few hours or at most a week. For some forecast themes, one does not know when the settlement will occur, or even if it will occur before the theme end date.

Settlement dates for the top 10 prediction topics on Polymarket. Source: Polymarket, Presto Research

This is also the key reason why the crypto prediction market is difficult to attract 0 DTE option users who prefer fast settlement. Due to the long ruling date, the returns of the crypto prediction market are not attractive to many users. Even if you bet on a theme with a similar winning rate, the return is only 2 times, which is not attractive to crypto meme enthusiasts who bet on a possible 10 times increase in 10 minutes. The risk of long-term capital occupation and the missed opportunity cost make the prediction market unattractive to those who pursue short-term huge gains.

• Solution: Design leveraged or interest-bearing products

One way to solve this problem is to design leveraged products that allow users to be more capital efficient. With leveraged products, users dont have to worry about their capital being tied up for a long time. Other solutions include using stablecoin interest-bearing strategies or even designing a lending protocol that allows users to borrow against their positions.

Undifferentiated forecasting services are unsustainable

The topics on crypto prediction markets today are no different than those on other platforms. Popular topics right now include politics (due to election season), cryptocurrencies, and sports. As a result, there isn’t much incentive to use crypto prediction markets alone, as cryptocurrency exchanges and sports betting sites offer better liquidity and user experience for these activities.

Most of the volume comes from politics and cryptocurrencies. Source: Polymarket, Presto Research

• Solution: Find a suitable and sustainable forecast theme

Currently, crypto prediction platforms such as Polymarket thrive on events such as elections and the Olympics, but these events do not occur frequently and may only generate short-term traffic to the platform. In order for crypto prediction markets to maintain continuous user engagement, it is necessary to introduce prediction services that are as long-term and exciting as sports or as regular as CPI releases and Fed rate hikes that other platforms do not have. Identifying themes that are unique or suitable for crypto prediction markets is the key to their growth and sustainability.

آخر میں

Although prediction markets offer unique opportunities and advantages, their influence in the Web3 space is just beginning to emerge. The barrier to entry remains high because participants need to be familiar with blockchain-related operations, including the transfer and management of cryptocurrencies (such as cross-chain bridging and using MetaMask, etc.). To truly realize the potential of crypto prediction markets, it is necessary to address these accessibility challenges and focus on creating a more user-friendly experience. I believe that with the above strategic improvements and larger-scale promotion, crypto prediction markets have the potential to redefine how we predict future events and how we manage risks.

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