When the Prediction Market is Lossless

A prediction market is a market which has been designed to make predictions. In other words, we use probability, our beliefs and past market scenarios to speculate the unforeseen future.

Let me use the World Cup as an example:

How to calculate bet odds?

Suppose me and my friend are making a bet on predicting which team would win the World Cup, given that we know the finalists. Now this is unforeseen, however, we can make our bets based on some factors like past performance of players, their training regimes, past matches that the two teams have competed against each other, what other people’s bets, etc.

What are the rules?

We are at a small party. A bookie started a game with a joining fee of $1, promising to buy each winner a $2 ice cream. The bookie collected $20. Let’s say after the world cup finals, 7 people had guessed the winning team accurately. They are rewarded with their ice creams. The bookie makes a profit of $20 — $14 = $7.

The bookie and 7 winners are happy. However, the remaining 13 people that lost the game are sad because they not only lost the game but also $1. This is the major downside with traditional prediction markets. The losing party loses their principal.

When the prediction market is lossless

Why do losers have to lose money? With the same decision making process and slight change of rules, we would not lose our principal by making an incorrect prediction. In the lossless prediction market, DeFi protocols like AAVE can be used to generate interest using the deposited principal amount from all the participants. The winners take the interest generated from all participants as the reward at the end of the prediction. The deposited principal remains untouched.

This lossless concept benefits everybody. Whether you are a beginner, hodler, market speculator, someone that got liquidated, or a sore loser :P It’s for anyone that is not willing to take risks but loves amplifying yields with prediction skills.