The prediction markets have been around since the 18th century, with bookies realising they can develop a system to determine the results of horse races. This market involves speculation about any future event or outcome. These events may include a political change, such as an election, position of a company, market fluctuation and more. Technological advancements, such as increased computational power and the advent of the internet have made such predictions more accurate than ever before. Specific algorithms have been designed to predict the movement of the financial markets too.
Although the prediction market has been around for centuries, there is one obstacle to the further growth of this system, which is centralisation. Experts see blockchain as the solution for this problem, since it can bring in decentralisation and ensure longevity.
The traditional prediction markets provide incentives to individual or entities for predicting outcomes of future events. This is very different from gambling, given that it doesn’t rely only on luck. It relies on observation and analysis of events and views of the general public or entities. At the same time, these markets are inefficient and costly to run. Due to centralisation in these systems, only a few entities are entitled to predict events.
The Potential Solution
Blockchain has revolutionised the technology sector ever since its inception in 2008. It offers a lot of potential to upgrade the current prediction markets. Blockchain is a distributed database or a shared digital ledger. It uses Public Private key cryptography, which is a way of locking data so that only those with the access key can open it. Anyone can see the data but cannot unlock and update it without the access key.
These records/transactions are incorruptible, which means that they cannot be edited once validated by the nodes and digitally signed to ensure their authenticity. Blockchain provides a decentralised database to store data. This means that data is not stored in a single location. The decentralised nature of the database makes it hard to infiltrate, since it requires access to every computer system on the network simultaneously to access the information.
Advantages of Blockchain in the Prediction Market
- No Central Authority: Blockchain technology networks don’t belong to one person or one group of people; in other words there is no central authority involved. Anyone who is part of the network can create or forecast an event, based on their analysis and interest. This empowers users within the network to focus their resources on what interests them.
- Low Cost: Blockchain works on a peer-to-peer distributed network. And, with no central server, the cost of daily operations reduces to nil. Cryptocurrencies are used by participating nodes or users to showcase their involvement in events in the prediction market. These alt coins power the entire transaction process and work as contracts until the transaction is completed. Incentives are transferred to the user’s account, with no extra fees, if the events in the prediction market go in their favour.
- Increased Security: Implementation of blockchain technology in the prediction markets will also strengthen data security. According to a report by Breach Level Index, close to two billion centralised records were hacked in the first half of 2017 alone. Blockchain technology provides a decentralised database, which eliminates the risk of single point failure, since all systems on the network need to be breached at the same time to access the data. This offers a feasible solution to address the threats to security in the prediction markets.
- Smart Contracts: The use of smart contracts can speed up the process of validating and enforcing contracts, while automatically ensuring that all the conditions are met for the contract.
- Greater Trust: Blockchain technology will also eliminate inaccuracies, and increase accountability and transparency in the working of a prediction market. This, in turn will foster trust among traders.
Looking back at the times when the prediction markets first started with horse races, this sector has certainly evolved. The implementation of blockchain will further enhance the efficiency of these markets, with higher levels of security, transparency and scalability, at very low costs, in comparison to the traditional markets.
Blockchain will also reduce the barriers to entry for new participants in the prediction markets, thereby attracting more people. The prediction markets can then target new customer bases, markets, geographical regions and more, increasing the potential for growth.