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Outlier Ventures Weekly Brief Issue #3 |   View Online
 
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Prediction Markets
Putting Wisdom Of Crowds To The Test
 
Making predictions is a hard business. From predictions of mail being delivered by guided missiles to the potential of creating nuclear-powered vacuum cleaners, history is filled with horribly wrong predictions. This is why it is often said that the only way to know the future is to build it. A prediction market is an options market for event probabilities. Investor belief in the likelihood of an event drives the price of shares in that event. For example, an investor who believes the probability of an event is greater than what the price of the share currently represents would place a buy order, expecting other investors to do the same, thereby driving up the price.  Prediction markets can be used for a lot more than merely speculating. Google has been using prediction markets to gauge employee sentiment towards the potential success of a product's launch. They have also been used by medical experts to track the potential outbreak of infectious diseases. Within the token economy, their use has been mostly surrounding the price of tokens, election and sports results. We suggest this primer from Cointelegraph for more on how prediction markets work. 
 
Prediction markets inherently carry a host of legal constraints for investors. This limits the number of participants in the prediction markets and hence the accuracy of predictions. One could argue that decentralisation frees prediction markets from these limitations. This is the basic idea behind Augur, which decentralises oracles as nodes in its network and has its token holders vote on event results. Gnosis, another decentralised prediction market, operates using similar principles but uses a centralised oracle to determine event outcomes instead of relying on the platform’s users. Other projects in the space include Bodhi, a prediction market on Qtum, Cindicator, which sources projections from both human analysts and artificial intelligence, and NumerAI (Erasure) -  an AI-run hedge fund which crowdsources machine learning algorithms for predicting financial markets in a weekly competition. More on prediction markets and the token ecosystem in this comprehensive report from Circle's Research team. 
 
The combined market capitalisation of the three leading prediction markets (Augur, Gnosis, Stox) is hovering around $103 million. The reason for this is highly linked to the lack of activity on their platform. This is not endemic to prediction markets alone. As stated in our State of Blockchains report - Q2DApps have been struggling to find traction over the course of the year. Part of the challenge with using prediction markets to hedge or bet on an outcome is the multiple currency exchanges involved (fiat to altcoin) and the difficulties in user experiences. In addition, according to Circle, the fee for a prediction market built on Ethereum could cost anywhere between 3% to 9%, discounting almost any cost efficiencies obtained through circumventing traditional banking systems. It is possible that we see a prediction market-based futarchy in the future, but for now, that day remains far off. Perhaps, waiting upon a scaling solution, simpler user experience and considerably lower gas costs. 

Graph sourced from trivial.co
 
News from the past week
 
 
1. Jeff Bezos to bring blockchain to companies in a few clicks -  Link

2Ohio accepts bitcoin for taxes now- Link 

3. Companies are trying to put the smart in smart contracts - Link

4. Huobi announced a derivatives platform - Link


5. Nasdaq announced they will pursue bitcoin products come 2019 -  Link

 
 
 
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Crypto is extremistan. We can’t predict what will happen; even historically cyclic markets have no guarantees of bouncing back.

The tech, however, gets 10x better every cycle. Scientific progress is not cyclic, speculation is.
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