In simple terms, a prediction market is a set of people predicting the result of an event and dates back to 1503 in which people bet on who would be the next papal successor.
A prediction market can be based on pretty much any event for which the outcome can be objectively verified after the event has occurred like price changes of stock, the value of a commodity, changes in weather, result of a soccer game etc.
Historically, prediction markets have been centralized and involve a ‘trustful’ party. A central entity maintains a ledger to keep an account of all predictions before an event has occurred and similarly, the trusted entity determines the outcome of an event and distributes payouts to the traders.
However, centralized prediction markets have many risks and limitations:
- Geographical Restriction: Centralized prediction markets are usually accessed through brokers and are only allow participation within certain geography which is usually within the borders of a country, state or city.
- Market Types: Centralized prediction markets are limited on the types of markets that can be created and are usually just operated for stocks and currency.
- Participation Conditions: There are different participation conditions like minimum amount that can be put, nationality etc.
- Fees: Centralized markets and their brokers' levy high transaction fees for participation as well as a big commission for rewards.
- Trustful system: But the biggest limitation in centralized markets is that they require traders to trust the market operator to not steal funds and to resolve markets correctly which often is a problem.
Decentralized markets, on the other hand, are trustless systems which mean that the participants do not need to trust any central party, or other participants, with their money. There is no single authority that controls the final result or the reward distribution. Trustless prediction markets, like Kyte.One, remove the risk of theft or corruption since they are deployed as smart contracts on trustless blockchains like Avalanche.
This excerpt is taken from Kyte.One Whitepaper and modified for a wider audience.
