How Decentralised Prediction Markets (DPMs) Tap into the Wisdom of the Crowds by@optionroom
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How Decentralised Prediction Markets (DPMs) Tap into the Wisdom of the Crowds

by OptionRoomSeptember 19th, 2021
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DPMs and the liberation of speculative markets

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Imagine a decentralised prediction market (DPM) being a lifeline in the game show Who Wants to Be a Millionaire, but the questions pertain to future events instead of past ones. “Who will be the next US president?” Or, “Will the price of Ethereum go up when it switches from proof-of-work to proof-of-stake?” It’s been mathematically proven that the more participants involved, the more accurate the eventual answer.

If thousands of people were to give input on any given issue, the group’s collective input would almost certainly lead to the correct answer. This is the basis of all DPMs.

Further to the game show analogy, a decentralised prediction market goes one step further by rewarding each person who backed the correct answer with tokens.

Prediction markets date back hundreds of years to the 16th century when individuals would forecast who would be the next political successor. These speculative markets were eventually legitimised in the form of financial instruments such as financial derivatives, but they continue to be the domain of traders and other specialised financial service providers.

DPMs are on course to liberate the speculative platform industry, given that it provides anyone with an internet connection the chance to create markets and speculate on other markets.

A few years ago, DPMs saw a notable spike in market entrants but many service providers fizzled away due to various challenges, including poor user interfaces, high fees, and poor liquidity. The industry has seen something of a resurgence of late, but many of these initial challenges persist. Ultimately, the success of any blockchain, including that of a DPM, hinges on user participation, which is intricately linked to the aforementioned challenges.

DPM Hurdles

The Oracle Problem is ongoing. To fulfill their smart contraction capabilities, blockchains must be able to connect to the outside world. This is where oracles work their magic, but many oracles continue to be centralised, negating the fundamental decentralised principle on which a purely decentralised blockchain is built. This siloing of a decentralised platform has various and profound implications for the entire network.

For one, there is an overreliance on potentially corrupt and incorrect information; platforms that don’t issue tokens and choose instead to deliver verdicts internally run the risk of platform manipulation. Phrased differently, users of centralised platforms are at risk of internal platform manipulation.

User participation is the engine of all blockchains

A blockchain without users is like a county fair without fairgoers. In a truly decentralised prediction market, anyone can create a market or speculate on a market, unlike in a traditional stock market, where you require a brokerage account to trade or speculate.

A limitation to market access is another symptom related to centralisation, in which central agents have the final say on which markets are available for speculation, while also holding the controls to set restrictive parameters in these markets. So, how do we open the gates and make it easier for the public to access these markets?

A key driver of user participation is an open and accessible user interface that appeals to crypto enthusiasts and those new to these types of speculative markets. Consider research firm Nielsen Norman Group’s principles of user experience: UX design must be simple and elegant; it must meet customer needs; and it must be a pleasant experience for users. The world of crypto is an infinitely complex space but users don’t need to be aware of what’s happening on the backend.

At OptionRoom, we have incentivised platform participation by introducing utility token rewards for protocol participants, governance token farming, and pool winnings distribution to pool creators. This ensures liquidity and open market participation. It not only opens the gates but rewards those who decide to enter and play.

Users can create a new market using a $ROOM utility token, enabling token holders to create their unique market access without the need for approval by a centralised authority. Moreover, platform participants that stake the $COURT governance token can vote on the resolution of oracle requests. It’s all about enabling and rewarding user participation.

Early in the 20th century, 800 competitors each bought cards for 6 pence on which they scribbled their guess as to the weight of a certain ox at the fair. The polymath Francis Galton observed that the median guess of the crowd was accurate to within 0.8% of the animal’s weight. It’s considered one of the first examples of “the wisdom of the crowds”, a concept that explains how the opinions of a large group of people can be a surprisingly good predictor of outcomes.

DPMs have enabled us to widen the scope of participation to a global scale, but it’s up to us, the providers of these platforms, to ensure that the good people are able to, and want to use it.