Primer

A short primer on prediction markets.

Prediction markets — also referred to as information markets, idea futures, event derivatives, decision markets, or virtual stock markets — are exchange-traded markets where individuals stake on the outcome of an event. In blockchain-based prediction markets, participants stake in the market in the form of event contracts. These contracts specify the different possible outcomes of a future event, a payment structure based on those outcomes, and the event’s outcome date. Unlike financial markets such as stock or commodities futures, which traders use to hedge against risk (i.e., farmers use futures markets to hedge against low crop prices, airlines use futures markets to hedge against high fuel prices), prediction markets primarily seek to aggregate information on particular topics of interest.

The principal informational value of a prediction market lies in the price of the futures themselves, which represent the average assessment of market participants concerning the likelihood of an event’s outcome, and the confidence level different participants have in their predictions. Prediction markets have far-reaching potential as a prognostic tool. From weather forecasting to abating the destruction of the Great Barrier Reef.