Wisdom of the Crowd: Advantages of Using Blockchain in Prediction Markets

Prediction markets have existed since the 1790s, when bookies realized they could institute a system to better predict the outcome of horse races. More recently, the advent of the internet ushered in a new era for the industry, making it easier for the global prediction community to more accurately evaluate various events using targeted algorithms.

While prediction markets have been available, and a part of our culture for generations, there is one major factor holding the system back: centralization. In searching for substantive change, a growing number of industry experts are looking at advancements in blockchain technology to decentralize the market, ensuring longevity in the space for years to come.

Traditional prediction markets let individuals or groups of entities predict the outcome of future events and be incentivized by the results. This is not to be confused with gambling, which relies solely on luck. Prediction markets rely heavily on the collective wisdom of the crowd to make informed decisions — a process that is surprisingly accurate at forecasting results.

For example, in fifteen U.S. presidential elections that occurred between 1884 and 1940, prediction markets on Wall Street accurately determined the outcome 73% of the time.

Still, while these processes do provide a unique insight into the mindset of the general public, these traditional prediction markets are largely inefficient and costly to operate. Under traditional models, only a select few in the system have the authority to create “prediction events,” leading to missed opportunities, favoritism, and other biases. Furthermore, because the system is typically centralized, there are often high costs associated with ensuring that each event is compliant with ever-changing regulatory standards.

Blockchain technology is a decentralized and immutable record of transactions that holds tremendous potential in bringing mainstream applications to prediction markets. Blockchain technology is not beholden to one person, or one group of people, meaning that anyone in the network can create an event based on their own interests. This puts the power back in the hands of the users to focus on what they individually find interesting and provides the overall community with a wider selection of prediction events in which to participate.

Additionally, because blockchain-backed programs have no central server, the administrative costs surrounding day-to-day operations are slim to none. Participants stake their involvement in a prediction event using tokens, which power the transaction and are “escrowed” for the duration of the contract. If the outcome returns in your favor, you receive the incentive with no outstanding fees attached.

Not only will this strengthen efficiencies and decrease costs, it will also provide an unprecedented degree of security to the market. According to the Breach Level Index, nearly two billion centralized records were breached in the first half of 2017 alone, equating to a staggering 10.5 million records per day.

As central servers increasingly become targets for hackers looking for easy access to data, decentralized networks are fast becoming an appealing alternative for industries seeking heightened security.

At Bodhi, we hope to take this a step further by creating a governance framework that will eliminate potential inaccuracies in the system. Traditional models are rife with vulnerabilities that can inadvertently lead to incentives being given to the wrong people. However, through Bodhi’s “Replaceable Oracle” mechanism, interested parties will have an opportunity to corroborate outcomes using a voting system that automatically occurs at the end of every prediction event. Through this process, we can implement a system of checks and balances that strengthens infrastructure and reduces the likelihood of failure.

Looking back to the days of bookies and horse races, the industry has certainly come a long way. But by harnessing the power of blockchain, prediction markets will soon provide greater security and efficiency to an expanding global audience at a fraction of the cost of traditional models.

However, by targeting new markets, in new regions, with new prediction events, the possibilities for growth are innumerable. I predict the future of prediction markets will be bright.

The article was firstly published on Nasdaq.